What Crisis: It’s Politics Stupid

2017-04-11 15:18
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Rob Brine of IQ Business


Yes, the foreign currency debt obligation sovereign rating downgrade on our bonds is negative, but it should not deter us from progress.

Don’t gloss over how terrible the last few days have been, but do understand the bleak picture in the investor roadshow slide deck (still available on the Treasury website) which Pravin Gordhan and his deputy had to work with.

They were probably intending to paint an accurate but not treasonous picture. What is certain is that they would have been good captains to steer South Africa in some stormy waters.

There has been considerable warning from all sectors about the structural reform that would have been required to avoid a downgrade.

Given the downgrade and the challenging policy environment, a series of mis-timed cabinet changes coupled with allegations of state capture does little to prevent market volatility.

A World Bank paper shows that ‘results suggesting that sovereign credit ratings systematically fail to predict currency crises but do considerably better in predicting defaults.

Downgrades in credit ratings usually follow currency crises, possibly suggesting that currency instability increases the risk of default.’ [Default, Currency Crises, and Sovereign Credit Ratings. Carmen M. Reinhart. World Bank Econ Rev (2002) 16 (2): 151-170]

We can admit freely that we face “major ongoing uncertainties [tick if sacking your Finance Minister twice in less than eighteen months applies] and exposure to adverse business [check], financial [think so], or economic conditions [yup] which could lead to the obligor’s inadequate capacity to meet its financial commitments [five from five]”. S&P Global Ratings definition.

A South African Reserve Bank Statement from 31 March 2017 noted that: “South Africa’s positive net international investment position (IIP) declined from R321 billion at the end of September 2016 to R155 billion at the end of December as the country’s foreign assets declined at a faster pace than foreign liabilities.’

The investment grade sovereign rating has been retained for the large majority of South Africa’s Rand debt obligations.

Meanwhile our equity market has generated the best returns globally according to research by Credit Suisse AG and London Business School for the past 100 plus years (Bloomberg, 2017). [Bloomberg, Credit Suisse AG, London Business School]

A year ago I wondered about the duel between Zuma and Gordhan and how the brave duo at the treasury were standing alone, between the wolf and the chicken coop.

Now there's a few more of us - it's a detour and we are at the cross roads.

It seems unlikely that the ANC members (are they factions yet) that oppose Jacob Zuma will have the sway required to recall the president prematurely.

Perhaps the country's safe delivery will have to come in June/July as the party heads to its National Policy Conference.

The level of fear mongering and misunderstanding of capital markets amongst business leaders should be alarming.

What has transpired cannot be easily undone and there is a long way to go to the 2019 National election.

It is not surprising that the recent rating by Moody’s has a negative outlook.

The firing of Pravin Gordhan, is an indictment on the ANC hijacked by Zuma – it simply isn’t the ANC of Luthuli, Mandela and Kathrada.

There must be few political organisations that can claim to have two Nobel Laureates among its former heads, and even fewer to survive with such a compromised leadership in a democracy.

Fifty years ago, the Chinese Cultural Revolution began – after the Great Leap had seen economic failure and a return to bourgeois politics. Perhaps we are journeying through our own cultural revolution.

Perhaps our fate rests in the hands of the ANC leadership, if so then we must appeal to the broader membership and the elders who cherish the ideology and values of old. 

Our own cultural revolution may start with the removal of the corrupt and morally bankrupt and a return to the leadership and ideals for which Mandela and Tutu fought.

One thing is certain, the outlook for growth will not improve until business, labour and government are focused on this without all the current distractions.

The optimists (and I am one) believe that perhaps a more competitive rand may provide an opportunity for change. We can only hope that once again, in the face of adversity, South Africa can find its way.

*Rob Brine is Senior Manager at IQ Business

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