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South Africa dodges the bullet



Fitch and Moody affirmed the country’s investment grade credit rating. That is, South Africa has avoided downgrades from the two agencies.
For long, two ratings agencies — S&P and Fitch — ranked South Africa only one level above “junk”, or non-investment grade status.

The downgrades were driven mainly by slowing GDP growth, which makes South Africa more vulnerable to capital outflows, rand depreciation, and rising budget and current account deficits ( among other things).

The economy has been hit by slower-than-expected growth due to the detrimental impact of the five-month platinum sector strike — Amcu shut down the industry for five months, the longest sector-wide strike in the nation’s history, in 2014 — on the economy, other labour unrest and generally weak demand both locally and globally.

Plenty of times the assessments get to the heart of the dilemma facing South Africa Reserve Bank governor Lesetja Kganyago, who is struggling to keep the weakening rand from fuelling inflation at a time when interest rates, at their highest level in five years, have left gross domestic product growing at its slowest pace since 2009.

Amid the growing concern that US Federal Reserve could raise interest rates next month, which is likely to weaken the rand and further fuel inflation, it must have been increasingly hard for the SA Reserve Bank to hold the repo rate at 7 percent at their last meeting this year.
If South African economic data pointed out to improving labour market, I am certain that the Reserve Bank would move in lock-step with the Fed to avoid accelerating the capital exodus from South Africa.

But let’s us not divert attention from the real problem; the Reserve Bank is not where the problem is. The problem is that the government doesn’t see growth as the biggest crisis in SA.
The government’s ability to carry out reforms has always been hamstrung by the standoff between senior leaders in the ruling ANC party.
Oftentimes, South Africans have found themselves standing at a cross roads; betwixt and between, watching an intense power struggle play itself out at the expense of governance and the economy.
It’s for the same reason that the nation stands in awe for what Pravin Gordhan, SA minister of finance, has done.

The once embattled minister thought beyond himself even amidst the fierce storm. What Gordhan, has done is laudable: he has done a sterling job in averting a downgrade.
He has been driving fiscal consolidation — cutting expenditure and reducing debt — and economic reform in anticipation of the S&P review this month.
The report will be issued next month. He has steadfastly refused to grant SAA a R5- billion bailout and has said SA cannot afford the nuclear deal or a zero percent fee hike for universities.
Gordhan knows that stalling the momentum in economic reforms maybe detrimental to economic growth and investor confidence.

There’s a lot of things that have happened in SA, many of which are naturally credit-rating-negative and may have been seen by foreign investors as a precursor to a full ratings downgrade to junk status in December and somehow compelled them to start to position their investment for that eventuality rather than wait for the actual downgrade.
But, I believe it did many investors well, and helped them think otherwise, to see a superlative job Gordhan was doing to put a downgrade at bay.
Gordhan, his deputy, Mcebisi Jonas, and the Treasury stood as a bulwark between SA and a devastating downgrade. Did I mention that they are the incorruptible bones that increase investors’ confidence?

We are yet to know S&P’s decision regarding a downgrade in December.
But that is not much of a big deal anymore: in assessing a sovereign rating, credit analysts, assets managers and others typically would not rely on the analysis of one agency.
Wage deal, also, may help in making S&P decide against a downgrade: agreeing to a three-year wage pact in the platinum sector has boosted the outlook for SA’s big three mines and SA’s chances of avoiding a junk status come December.

South Africa’s big three platinum producers are celebrating wage deals reached with unions without a single day lost in strike — the very strikes that negatively affected economic growth of SA and landed it in this hot mess — and that might benefit South Africa credit rating in December.

Gordhan did not blink in the war of attrition over SA’s future and in so doing saved South Africans, and non-South Africans, from a disaster that was to happen. A disaster that would last for many years given SA’s huge debt.
Africa is then happy that Gordhan is not pliable as in standing for what he believes in, what is right, he became a lifeline for Africa.

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