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South Africa is junk status among international credit ratings agencies. In this interview with BizNews editor Jackie Cameron, Andy Rissik – MD of Sable International’s Forex Division – tells how the downgrades took the markets by surprise. He explains how the decisions affect South African consumers and shares his updated forecasts on the Rand’s trajectory. – Jarryd Neves
Andy Rissik on South Africa’s double ratings downgrade:
Just having a look at the way the rand reacted, I think it’s been quite a muted reaction, considering the severity of what this really means. Also, just looking at the media on a daily basis, there was nothing really leading up to Friday that would have given me any indication to expect this. If you look at the fiscal situation that South Africa is in, I think it’s probably the right thing. But was it expected? I don’t think so.
On the value of the rand:
This is going to have a material effect. It really now squeezes on an already tight fiscal position, where we are going to be collecting a lot less tax this year because of Covid. Our cost of borrowing is going to go up, so government is either going to have to increase taxes or borrow more. Either way, it’s going to come at a massive cost to the economy and that, generally, is rand negative. I do think that from a risk perspective, we’ll see the rand coming off.
On the affect of foreign currency on the rand:
I think we mustn’t fool ourselves to think we are in an isolated situation, in terms of the Covid effect on the global economy. Every single economy has been very negatively affected. So, I think they’re all having their own issues and a lot of what we would always regard as sort of first-world developed market economies are also facing downgrade threats. In the grand scheme of things, relative, this may not be as bad news as it would be if we were standing alone in this problem.
On government spending:
I think the real issue – and the thing that we’re not focusing on – is the fiscal discipline and the ability of our government to control spending on government salaries, and also our debt servicing costs are actually getting out of control. The reality is that South Africa is running out of money and we are very close to the point where there is no more money to keep increasing salaries.
If you compare government sector to private sector in South Africa over the last year, under Covid, a lot of the private sector took salary cuts, a lot of them were laid off for periods of time. This hasn’t happened in government. I think the government have gotten off quite lightly – a lot of the government workers – but I think it’s going to have to change. Tito Mboweni – I think he’d love to do it – but I think that he’s got a lot of political pressure to do it slower than needed.
On what the ratings agencies are telling us:
I think what they’re telling us is that they are not impressed with what’s been done. They’re very impressed with what’s been said. I think there’s absolutely no doubt. If you go and read what Tito Mboweni and what the government are saying, it’s fantastic. But implementation has always been the biggest problem of the government – because of the various different interested parties who really control government.
These downgrades are just a clear message that the market is not believing that we’ve done enough or that we are even planning to do enough. The debt in South Africa is being seen as more and more risky. Frankly, once you start going down this trajectory of getting further downgrades this quickly, it means that they see it as an unsustainable path. This is something that government really needs to focus on quite seriously.
On whether things can get worse for South Africa:
I think they can definitely get worse. There are lots of reasons why we could get further downgrades. There’s a lot of risk facing us. Our public sector wage bill is still way too high. Our unemployment rate has increased hectically this year and I don’t really think there are enough initiatives in place to attract a lot of foreign investment. The whole world is vying for foreign capital to be invested into their economies and we’ve still got a lot of policy uncertainty here.
Our crime rate is kind of back to where it was pre-Covid. I think that the government is doing quite a lot to stop corruption – again, lots of talk – I think the wheels of justice do seem to be turning slowly, but the reality is that there’s still a lot of corruption. I do think there’s probably a path downwards still, before we hit the bottom and start climbing those difficult steps back towards investment grade ratings.
On rand forecasts:
I think the rand is heavily undervalued as a currency. If you look at it fundamentally, the buying power of the rand is just so weak. I think it’s the second lot of downgrades this year, so I think the reaction will be less than what we saw in March. Once you’re sub-investment grade, there’s kind of a structural devaluation that happens.
To an extent, we had that big blowout in March, which was very much overshadowed and masked by Covid. That really was a structural resetting, I think, of the baseline of the rand and how it’s valued. At the end of the day, the rand is valued on lots of different fundamentals so I think longer-term, we will still see that steady 7-8% decline per annum against the harder currencies.
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