South Africa’s finance minister has pledged to defend the country’s credit rating and avoid the damaging consequences of Africa’s most industrialised nation slipping to junk status.
A downgrade would raise the cost of borrowing for the government and state-affiliated entities, trigger outflows of funds from its bond markets, weaken the rand and lead to the knock-on downgrading of the country’s banks at a time many consider to be South Africa’s toughest economic period since the historic transition to democracy 22 years ago.
The threat of a credit rating downgrade to subinvestment looms large after Standard & Poor’s changed its South Africa outlook from stable to negative in December on its rating which is one grade above junk status.
“The consequences of [any] downgrade are well known, both within the Treasury and now within government . . . we make no secret of it,” Pravin Gordhan, the finance minister, told theFinancial Times. “We are very committed to restoring credibility in our fiscal path.”
Mr Gordhan was reappointed finance minister in December after President Jacob Zuma sent shockwaves through financial markets by appointing an unknown backbencher to the post until he reversed his decision four days later. The mishandling of the events running up to Mr Gordhan’s appointment have threatened the hard-won credibility of South Africa’s Treasury and is deemed by many observers to have heightened the risk of a downgrade.
Mr Gordhan, who was respected during a first period as finance minister from 2009-14, said the government and the ruling African National Congress had “a very profound and practical commitment to further fiscal consolidation”, as well as creating a “more dynamic growth path”.
“Finance ministers, in particular, are very good at not wasting crises, and in a sense, focusing the mind, both within government and outside, on the necessity to do the fiscally correct things,” says Mr Gordhan.
The chaos surrounding Mr Gordhan’s appointment means he is under pressure to deliver an austere budget later this month. He is expected to outline measures to raise additional revenue and cut government spending under the watchful eye of wary rating agencies and investors.
“We want to navigate a path which will enable us to take on board what the rating agencies feel, but that is not going to be the sole determinant of what we do,” Mr Gordhan said. “Every enterprise, including the state, has fat in the system which, when the time comes, you will have to attend to and make sure you can trim.”
Last month, the International Monetary Fund slashed its 2016 South Africa growth forecast to 0.7 per cent from 1.3 per cent, which would be the lowest level since the 2009 recession.
Government debt has increased from 20 per cent of gross domestic product in 2008, to 47 per cent, while the Treasury is battling twin fiscal and current account deficits.
The central bank, meanwhile, raised interest rates by 50 basis points last week as it seeks to stem inflation, fuelled largely by the dramatic fall in the value of the rand over the past year, as well as by a serious drought that has pushed up food prices.
The twin challenges of deteriorating growth and rising inflation in a country plagued by chronically high levels of unemployment and widespread poverty in one of the world’s most unequal societies, highlights the extent and complexity of the task facing Mr Gordhan.
Mr Gordhan took a swipe at the rating agencies, saying they needed “to seriously reflect on their pro-cyclical character”, implying they were too quick to downgrade at the first sign of trouble.
“They need to have some sense of social and historical context: where do we come from and what are indeed the kind of structural challenges that this government is trying to cope with,” says Mr Gordhan. “In the past 20 years has the ANC government not kept its fiscal promises?”
Jabu Mabuza, executive chairman of Sphere Holdings and one of the country’s most prominent businessmen, said it was crucial South Africa avoided a credit rating downgrade.
“Pravin has got a big job to do. His main job is how to avoid a ratings downgrade. That would be the final nail.”
(c) 2016 The Financial Times Ltd.