DOWNGRADE:
AS SOUTH Africa digested the news of Standard & Poor’s (S&P) rating downgrade to junk status following President Jacob Zuma’s “night of the long knives” cabinet reshuffle last month, the country got slapped with another blow. Fitch yesterday downgraded South Africa’s status to “BB+” from “BBB-”, which is the equivalent of junk status. A third agency, Moody’s, placed South Africa’s credit rating on review for downgrade.
Even if these agencies’ biases and competence should be questioned, downgrades will lead to a meltdown of the rand.
This scenario will mirror the events of 1985 when thenpresident PW Botha delivered his crazed Rubicon speech, which resulted in a $13 billion default. The foreign debt/GDP ratio hit 40%. Today it is nearly 50%. Botha was compelled to impose exchange controls.
As Zuma goes for broke, the main task ahead for South Africans is to renew the ideological debate over how to protect the currency and kick-start the economy – sensibly and without corruption.
The National Treasury and SA Reserve Bank could initiate a long-overdue era of redistribution, racial justice and radical economic transformation.
They will need to impose tighter exchange controls to protect the currency, lower interest rates, har ness the power of state-owned enterprises but without the recent corruption, and increase strategic state spending.
New Finance Minister Malusi Gigaba promises to pursue at least one of these at his first press conference after being sworn in.
He said that one of his key focus areas will be to accelerate “radical economic transformation”. Cynics might point out that he made his comments on April Fool’s Day.
Similar false promises of transformative infrastructure left the country disappointed during Gigaba’s role as minister of state enterprises between 2010 and 2014.
Instead, he bought into the mania for megaprojects which either didn’t work or rewarded carbon-intensive corporations, such as:
Eskom’s corrupt and unnecessary Medupi and Kusile coal-fired power plants. Its desired R1-trillion in nuclear plants apparently precontracted (liability-free) from Moscow’s Rosatom.
Transnet’s climate-frying facilitation of an R800bn plan to export 18 billion tons of coal from Limpopo.
Mpumalanga and KwaZuluNatal and a R250n Durban portpetrochemical expansion.
PetroSA’s R80bn Mthombo refinery.
World Cup stadiums now recognised as white elephants after initial assurance they would not be.
Thankfully one of Pravin Gordhan’s last acts as finance minister was to halt the ridiculous R6.4bn Durban 2022 Commonwealth Games.
Sports events aside, these megaprojects are mainly the foibles of state-owned enterprises which S&P singled out on Monday as its second reason – after political hijinks – for the rating downgrade.
Of particular concern are government guarantees used to underwrite public enterprise liabilities which the rating agency forecasts will reach R500bn by 2020.
If instead of megaprojects, Eskom and Transnet built renewable energy and cheap commuter rail transport, radical economic transformation would make South Africa much more sustainable. But that would require a 180-degree turnaround.
Since Zuma won’t reverse either the cabinet reshuffle or his patronage tendencies, tighter exchange controls are the only way to prevent a debilitating raid on the currency.
Once two rating agencies have downgraded the local