One could hear the collective cheers, albeit short-lived as the Rand backtracked soon after Moody’s retained South Africa’s credit rating with a negative outlook. Moody’s highlighted improvements in expected growth, government debt and institutional strength as key drivers. But South Africans must be wary that the real threat comes from Fitch and Standard & Poor’s.
While Moody’s rating sits 2 notches above junk, both S&P and Fitch are one blip away, with both reporting in June. In the piece below Dave Steward agrees with the Moody’s summation, but he highlights areas of concern that could have a far greater influence on future ratings. The FW de Klerk Foundation’s director says the internal struggles within the ANC are problematic.
And while there’s talk of a need for national unity to keep the nation investment savvy, it’s these internal struggles that could lead the country to bankruptcy. A fantastic read. The post was first published on the FW de Klerk Foundation website. – Stuart Lowman
By Dave Steward*
There is an eerie unreality about the debate that has followed Moody’s decision to retain South Africa’s rating at two notches above junk grade status (with a negative outlook).
Moody’s explained its decision on the basis of three principal considerations:
• South Africa’s economic growth is expected to recover after reaching its trough in 2016 – based on the prospect of closer collaboration between government, business, labour and civil society in restoring confidence in the economy and addressing the constraints to economic growth;
• following the 2016 budget, it is expected that general government debt to GDP will be stabilised under the direction of the Treasury – which has a reassuring fiscal track record; and
There was, understandably, a collective sigh of relief following the Moody’s assessment – but also concern that South Africa must still survive the imminent verdicts of the other two ratings agencies, Standard & Poor’s and Fitch – who are generally sterner in their judgments than Moody’s.
There is also a general perception that the downgrade threat has resulted in a new-found unity between government, labour and business. Avoidance of the downgrade was, according to Deputy President Ramaphosa, “a great success for us because that shows what we can achieve when we work together.”
According to Finance Minister, Pravin Gordhan “We developed a common intent among labour, business and government that we don’t want to be downgraded and that we have many positives to say about ourselves.”
On Monday, 9 May he added that he was “very optimistic that the Team SA approach is one that we can extend to the next two ratings agencies … and in particular, the interaction between labour, government, and business.”
Also on Monday night President Zuma promised that business and government would “work to reduce policy uncertainty and shore up the confidence in government’s ability to deliver on its promises of boosting growth.”
The President’s assurances are most welcome because much of the present downgrade threat has been created precisely by deep “uncertainty” in several key areas of government policy. These include
• The future of property rights following the adoption of the Protection of Investment Act, the Expropriation Bill, and dark forebodings concerning government intentions regarding land reform.
• Doubts about the future of the mining industry caused by the Mineral and Petroleum Resources Development Amendment Bill (which is still in the pipeline after having been referred back to Parliament last year) and the new unilaterally imposed Mining Charter – in terms of which mining companies will have to maintain 26% black ownership, regardless of the number of times that black share-holders sell their shareholdings.
• The ability of companies to retain essential management skills following the threat of Minister of Labour, Mildred Oliphant, to impose draconian punishments on companies that fail to make progress toward the achievement of racial employment quotas.
She was particularly concerned that white South Africans still compromise 68.9% of top management in the private sector (without mentioning that whites compromise about the same percentage of the work force with degrees in the 40 – 65 age group from which top managers are almost invariably drawn).
• Imbalances in labour policy caused by COSATU’s membership of the ruling Alliance and the strongly anti-free market orientation of the communist leadership of most of the major trade unions.
All this is taking place against the backdrop of a gargantuan struggle for control of the ANC following perceptions that President Zuma has succeeded in capturing the commanding heights of the state.
These include key state organisations – such as the National Prosecuting Authority, the intelligence services, the Hawks and the SABC – that were once regarded as components of the “institutional strength” that had so impressed Moody’s.
A key aspect of this struggle is the continuing battle between the President and the Minister of Finance for control of financial policy.
Minister Gordhan is fighting valiantly to hold the line of fiscal responsibility – so essential for future ratings – in the financial policies of the state and within the boards of key state corporations. The President reportedly wants to prevent Minister Gordhan from thwarting his plans for the SAA and for the building of nuclear power stations.
It is considerations such as these – and, in particular, the outcome of the struggle between the President and the Minister of Finance – that will determine future ratings.
Deputy President Ramaphosa and Minister Gordhan are quite right to emphasise the importance of national unity in addressing South Africa’s enormous economic challenges. This is also one of the main requirements in the National Development Plan (NDP). But how will we be able to maintain national unity when, in terms of its National Democratic Revolution (NDR), the ANC government is committed to progressively limiting the economic roles and position of minorities on the basis of their race?
The government must choose either the genuine cooperation between all role players and communities that is implicit in the NDP and in the approach now advocated by Minister Gordhan and Deputy President Ramaphosa – or the division and economic collapse that will inevitably follow the further implementation of the NDR.
• Dave Steward, Executive Director of the FW de Klerk Foundation.