Gigaba now faces stark economic realities - financial expert

Cape Town - New Minister of Finance Malusi Gigaba now faces the stark realities of South Africa's economic situation, according to Ian Matthews, head of business development at independent investment bank and corporate finance advisory firm Bravura.

He was reacting to Gigaba's comments after Standard & Poor's downgrade of SA’s long-term foreign currency rating to sub-investment "junk status" on Monday evening. The ratings agency said the massive Cabinet reshuffle shortly after midnight on Friday has put policy continuity at risk.

Gigaba admitted that the downgrade will impact private investment, but said he will not be distracted by "external issues" in the quest to radically transform the SA economy so that "it works for all South Africans". In his view, this includes enabling SA to rely on its own resources and for government to live "within its means".

Matthews pointed out that SA's gross domestic product growth has decreased steadily for the past three years from 2.3% to 1.6%. The tax revenue shortfall of R30.4bn for the fiscal year ending March 31 2017 is also the largest since the 2008 global economic crisis. Government debt now stands at R2.2trn (50.7% of GDP), with guarantees to state entities totalling R477.7bn (11.5% of GDP).

"SA's economy almost ground to a halt in 2016 with a growth rate of 0.3% down from 1.3% in 2015. The mining and manufacturing sectors have been shrinking as global trade and output patterns change. The reality is that the ability of the fiscus to respond to SA's challenges in an environment of low growth is severely limited. Government is already stretched to breaking point," said Matthews.

"There is consensus that SA's economy needs to grow by at least 6% to significantly reduce unemployment, poverty and inequality. It is critical for both public and private investment to be mobilised in the creation of a robust, inclusive economy."

In 2016, domestic investment contracted for the first time since 2010, declining by 5.9%. In March 2017, Treasury acknowledged that concentrated efforts to strengthen business and consumer confidence are required, and that the low levels of private sector investment will have to be addressed if the South African economy is to be transformed.  

Matthews said it is clear that increased domestic private investment will only take place when government creates an environment that strengthens business and investor confidence to help the country move out of its low-growth cycle.

"Clear and consistent policy-making, good governance and a clamp on corruption will promote private investment," he said.
 
"The events of last week are not indicative of a government that treasures the fragile confidence of the business sector. Uncertainty amongst local and international investors is likely to reverse SA into another low-growth cycle, with dire consequences. Indeed, the S&P downgrade will have severe consequences for the SA economy going forward."

That is why he sees SA at a crossroads.

READ: Cloud of doubt hangs over Gigaba's credibility, capabilities

Cas Coovadia, managing director of the Banking Association of SA (BASA), said on Monday that S&P's sovereign downgrade to junk status is a direct consequence of "poor leadership and self-serving political gain over the greater national interest".

"The actions by the president in the early hours of last Friday were clearly not in the national interest. BASA and a number of other organisations warned that such reckless actions could lead to a ratings downgrade. This has, unfortunately, become reality to the detriment of the banking sector, small and medium businesses, corporates and everybody in SA," Coovadia said in a statement.

"This downgrade means SA will pay higher interest on our debt, which we need to balance our budget. This will leave fewer funds for social development, with a direct negative impact on the most vulnerable in our society. The president must, sadly, take responsibility for this."

Coovadia said South Africans must now recognise the crisis they are in.

"This crisis calls for all South Africans with national interest in mind to join forces to ensure good and accountable governance, with leadership that is informed by the interests of all South Africans," he said.

"This sovereign downgrade will lead to a steep erosion of already poor levels of investor confidence. Negative investor confidence will directly undermine an economy already struggling to achieve the levels of growth needed to meaningfully create jobs or lift our population out of poverty."

Warren Schewitz, CEO of Clear Asset, said on Tuesday that, with the weakening of the rand, they are seeing continued appetite from international buyers for high value moveable assets. This is particularly so for generic equipment that has global application.