The classical definition of developing nations is countries where politics supercedes economics. South African political leadership is supporting this description through an updated version of the 1970s anti-Apartheid rallying cry of “Liberation before Education.” This time it’s “Transformation before Economic Growth” with social engineering – and its ugly spinoffs of corruption and crony capitalism – the hallmark of the second Jacob Zuma Administration. The consequences, typified through events around Optimum Coal, sends all the wrong signals to potential investors. Worse, putting political ideology ahead of economic reality carried high social risks in a country where unemployment has been over 25% for more than a decade. On a more obvious scale, application of such dogma makes Finance Minister Pravin Gordhan’s task of retaining the investment grade status of the country’s debt virtually impossible. With yet more negative knock-on effects in a country which relies on foreign funding to fulfil its hunger for development capital . – Alec Hogg
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(Bloomberg) — Politics could stand in the way of South African Finance Minister Pravin Gordhan’s efforts to fend off a junk credit rating in six months’ time.
While S&P Global Ratings and Fitch Ratings Ltd. this month affirmed South Africa’s rating at BBB- rating, the lowest investment grade, they said the government must take decisive measures to bolster growth, quell policy uncertainty and end political turmoil to avoid a future downgrade.
With the economy having contracted 1.2 percent in the first quarter and local government elections looming in August, Gordhan will be hard pressed to appease the ratings companies without alienating labor unions allied to the ruling African National Congress.
“Gordhan is up against political constraints,” Daryl Glaser, a politics professor at the University of the Witwatersrand in Johannesburg, said by phone. “It’s going to be very difficult juggling all these imperatives.”
The ANC will be reluctant to clash with the unions, which have underpinned its dominance of South African politics since it took power in 1994 by helping rally election support and raise funding.
The Congress of South African Trade Unions, the country’s largest labor group, has rejected proposals to rein in spending, sell stakes in state assets or make it harder for workers to go on strike. Cosatu has backed other measures that have spooked investors, including government plans to force mining companies to perpetually maintain a 26 percent black shareholding even after investors sell stakes, introduce a minimum wage and expropriate land without market-related compensation.
“Pacifying rating agencies is not a panacea to our economic problems,” Cosatu said by e-mail. “The introduction and enforcement of unnecessary austerity measures will only send our economy on a death spiral and cause social instability.”
Today we live in a world where politics and economics are closely related – SA Finance Minister Pravin Gordhan @cnbcafrica @forbesafrica
— CNBC Africa (@cnbcafrica) June 10, 2016
President Jacob Zuma has undermined Gordhan’s efforts to make changes since reappointing him in December to halt a market rout sparked by naming little-known lawmaker David van Rooyen as finance minister.
Over recent months, Zuma has stymied his efforts to appoint a new board for the unprofitable state airline and has refused to bow to Gordhan’s demands to fire the nation’s tax chief Tom Moyane for insubordination. The president also described Van Rooyen as the most-qualified finance minister he’s appointed.
“It’s a legitimate question,” Gordhan said at a June 10 event organized by the Daily Maverick news website in Johannesburg, when asked whether he had the backing of Zuma and the ANC. “I have been given a job to do and I will do it. All of us are now committed to go through the next six months.”
Gordhan, 67, reaffirmed the government’s commitment to narrow the fiscal deficit and limit gross debt by reducing spending and raising taxes. Those goals would be achieved while maintaining investment in infrastructure and without cutting social spending, he said.
Protracted Strikes
South Africa needs to reform its labor laws to reduce protracted strikes, create certainty about black empowerment laws in mining and ensure greater cohesion within government if it is to maintain its rating, said S&P, which is scheduled to do its next review in December. Fitch warned it could lower its assessment if fiscal policy is loosened and external debt climbed, or if political instability affected the economy or public finances.
Political wrangling undermines Gordhan’s efforts to create policy certainty and boost growth and deters investment, according to Iraj Abedian, chief executive officer of Pan-African Investment and Research Services.
Time for plans is over. South Africans (and rating agencies) want action – Finance Minister Pravin Gordhan.
— Sure Kamhunga (@sure_kamhunga) June 9, 2016
“Economic growth is literally left to luck at the moment,” he said at the Daily Maverick event. “South Africa is going through a crisis. I see an economy gripped by undesirable forces both internally and externally.”
Investors consider South Africa more risky than some junk-rated countries. The cost of insuring against non-payment of debt for five years using credit-default swaps is 42 basis points higher than for Russia, which is rated speculative grade by both S&P and Moody’s Investors Service, according to data compiled by Bloomberg.
‘Under Pressure’
“Our base case is that S&P downgrades South Africa’s foreign currency credit rating in its December review,” Bank of America Merrill Lynch Global Research said in a report released Tuesday. “We expect GDP growth to remain under pressure as the political situation prevents the reforms necessary to boost confidence.”
Meaningful reforms are unlikely to be implemented before the Aug. 3 elections, which are set to be the most closely contested since white minority rule ended in 1994, according to Mike Schussler, chief economist at Johannesburg-based research group Economists.co.za. He puts the chances of a downgrade to junk at 75 percent.
“In the main, the decisive measures that the rating agencies want, many of them we are not going to be able to get very quickly,” Schussler said by phone. While Gordhan is highly respected, “I don’t think he has enough clout to do all the things that may be necessary,” he said.
