South Africa’s new finance minister Malusi Gigaba certainly does not want in the ambition department. Six years ago, soon after his appointment to head the State Enterprises portfolio, Gigaba’s office contacted me to set up a “confidential briefing”. Despite our best efforts it never happened.
This was very unusual. SA cabinet ministers rarely pursue editors, much less to offer them chummy off-the-record chats. I was surely not the only one approached in this way. Ambition, however, is a terrible defect for those earning their daily crust in service to their fellows. It is the ultimate distraction for the supposed purpose of elected officials. And encourages the dangerous acceptance, without interrogation, of myths and untruths which serve their own objectives.
We see this in Gigaba’s superficial analysis of the performance of the Rand since the S&P and Fitch downgrades. What he and his advisors have completely missed is how, for now, “junk” status only applies to SA’s foreign debt, a modest 10% of its total borrowings. For all practical purposes that’s rather meaningless. Except in pointing to the looming problem.
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Of far greater importance is the rating on SA’s Rand-denominated debt. For the moment, that’s still investment grade with only Fitch having downgraded to junk. The other two big agencies have the rating on the cusp, although now with a “negative” outlook. Which means unless something sensationally positive happens, next time either agency updates its assessment, SA’s all important Rand-denominated debt becomes junk.
Here’s why that matters: Depending on which insider you ask, there is between R150bn and R250bn in Rand-denominated RSA gilts currently owned by global index funds. These funds have a strict mandate to only hold “investment grade” assets. So when SA’s next ratings shoe drops, and two out of three makes everything junk, those funds have no option – they are forced to sell SA’s bonds, flooding the market with Rands chasing hard currencies.
That Gigaba is ignorant of this looming is pretty obvious. Three weeks into the job, he mouthed off about how his efforts had restored confidence in the currency. He was referring to the Rand’s appreciation from the post-Gordhan firing trough of R14, to R13 against the US dollar. Gigaba ascribed this to the impression he made in Washington by attending the mid-April’s Spring Meetings of the International Monetary Fund.
Which it absolute rot. While Gigaba’s acolytes celebrated his comments, shrewd traders immediately started to look past the money wave flooding into emerging markets and began started selling the Rand which has now given up almost half the recent gains.
But that is nothing with what is in prospect. What we are witnessing is reminiscent of WW2’s “Phoney War” between September 1939 and April 1940 when apart from the declarations, nothing much happened. Then all hell broke loose. For SA, hostilities will only begin when the second junk rating downgrade hits. So stock up on those rand hedges while you can. Like yesterday.
