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How Moody's may see Gupta uproar - Kevin Lings

Mar 17 2016 21:00
Liesl Peyper

Cape Town - The admission by Deputy Finance Minister Mcebisi Jonas that the Gupta family offered him Nhlanhla Nene's job before the latter was shown the door is just the latest in a number of misadventures that will have a significantly negative effect on South Africa’s economy and standing as an investment destination.

Stanlib chief economist Kevin Lings told Fin24 on Thursday that the deterioration at National Treasury - which includes the firing of Nene, the standoff between Finance Minister Pravin Gordhan and his deputy’s revelation - would be seen as a weakening of South Africa’s institutional capacity.

Rating agency Moody’s is currently on a visit to South Africa to determine if the country should be downgraded. “They won’t just focus on one micro aspect,” Lings said, “but rather on a range of events.”

Lings said that among the rating agencies, Moody’s in particular values institutional capacity and will be focusing on the independence, stability and expertise at the Reserve Bank, the South African Revenue Service (Sars) and National Treasury. “It has a big weighting in the valuation process of a country’s investment grade.

“They’ll also ask themselves if the appropriate people are being appointed at these institutions, and whether their policy decisions are aligned with government policy.”

Lings is of the view that the deterioration is sufficiently significant for Moody’s to downgrade South Africa, because the country is already on credit watch. “A downgrade is very likely - my expectation is one notch above junk status, and (that) they will highlight the fact that our institutional capacity has deteriorated.”

He conceded that things tend to move slowly and then suddenly in politics, “so it’s hard to say what will be happening in a month’s time. It’s probably a good thing that these revelations (about the Guptas’ involvement in cabinet appointments) are being made, but the reality is that we don’t know to which extent.”

A ripple effect of the current upheavals, Lings said, is more volatility in the rand, which could increase the prospect of another interest rate hike by the Reserve Bank to stabilise currency markets. In addition, the cost of borrowing would go up -  even without the revision of a credit rating - “because the markets don’t wait for that”, Lings added.

The political instability would also erode business confidence, because business leaders want assurance that they can properly engage with a particular ministry, and that sound and sensible policies are in place and consistently applied.

Christie Viljoen, economist at KPMG South Africa, said the current state of affairs shows that “anything can happen” in South Africa’s politics. “We’ve seen it with Nhlanhla Nene’s firing and now with the Gupta revelations.”

He believes the latest incidents would make it easier for Standard & Poor's and Fitch to downgrade South Africa to junk status. “All these things reaffirmed the concerns they had about South Africa.”

The only positive thing that could come out of this is a change in political leadership, Viljoen said.     

Follow Fin24 on Twitter, Facebook, Google+ and Pinterest. 24.com encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

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