Fitch downgrade ‘bad, but don’t panic’
THE decision by rating agency Fitch to downgrade South Africa to junk status is nothing to panic over, says former Cosatu economist Neva Makgetla.
“Is it a bad thing? Yes, it is. Is it the end of the world? No, it’s not,” she said.
“What these rating agencies are doing is using these downgrades to hit President Jacob Zuma over the head.
“Look at it this way, Russia and Brazil have even lower ratings than South Africa – and many other countries aren’t even rated,” Makgetla said.
She said South Africa, having only been upgraded in 2000, then went out and borrowed big.
“Where the downgrades will hurt South Africa is in the area of US pension funds investments. They are not allowed to invest in countries that have junk status, which means they will be unable to invest in, say, an Eskom.”
The other problematic thing about the downgrade, Makgetla said, is that it will push up the exchange rate.
A far bigger concern, she believes, is the issue of good governance in the Treasury – and that an inexperienced minister will not inspire confidence.
The National Treasury described the Fitch downgrade as a setback, but insisted that the government would stick to fiscal consolidation. “Government remains committed to making sure that its work with business, labour and civil society continues in order to improve the business confidence and implement structural reforms to accelerate inclusive economic growth,” the Treasury said.
The Banking Association of South Africa (Basa) described the down- grade as devastating. “The fact that Fitch has directly attributed its downgrade to the actions of the president demonstrates in no uncertain terms the broad assertion that the cabinet reshuffle, although the prerogative of the president, was not in the national interest,” said Basa managing director Cas Coovadia.
Economist Dawie Roodt also advised South Africans not to panic.
Roodt said the latest downgrade would have minimal effect on an average consumer in the short term.
He told Independent Media that the rating “means that South Africa is not seen as an investment destination”.
Fitch was the second rating agency after Standard & Poor’s to downgrade South Africa’s sovereign debt to sub-investment grade, or junk status, this week.
SA Institute for Race Relations chief economist Ian Cruickshanks called the downgrade “disastrous”.
He said the downgrade would “weaken standards of governance and public finances”.
Fitch said: “In our view, the cabinet reshuffle, which involved the replacement of the finance minister, Pravin Gordhan, and the deputy finance minister, Mcebisi Jonas, is likely to result in a change in the direction of economic policy. The reshuffle partly reflected efforts by the outgoing finance minister to im- prove the governance of state-owned enterprises. The reshuffle is likely to undermine, if not reverse, progress in SOE governance, raising the risk that SOE debt could migrate on to the government balance sheet.”
Cruickshanks contended that this downgrade would make it difficult for South Africa to access foreign capital, and may result in the SA Reserve Bank (Sarb) hiking interest rates.
“Sarb could raise interest rates by as much as 2% in no time because it will have to protect capital outflows.”
The CEO Initiative described the downgrade as another blow to all South Africans, who they said would “pay the price of these actions for many months to come”.