A wake-up call for South Africa to revisit key economic policies
currency debt, the country will be dropped from the Citibank’s World Government Bond Index.
As Sygnia’s Magda Wierzycka warns: If our rand-denominated debt is rated as junk by S&P and Moody’s, South Africa will be dropped from the index. Immediately on that happening, about $10bn (R137bn) will flow out of the country.
That could tempt the SA Reserve Bank to rapidly raise interest rates to protect the rand and restore financial inflows.
Higher rates give investors a return needed to offset risk. It has taken drastic action like this before. In 1998, governor Chris Stals raised rates by 7 percentage points within two weeks, as the currency crashed from R7 to the dollar to R10.
Instead, a different strategy is needed to deter financial predators and gain the space to lower interest rates: tighter exchange controls.
South Africa already has some in place. Pension funds and other institutional investors must retain 75% of their assets in the domestic market. By all accounts this saved South Africa during the last financial meltdown in 2008.
But more controls are needed. Foreign financiers are a fickle group. French bank Societe Generale, for example, recently increased its rand assets in search of high interest rates.
Currently only two countries are paying more on 10-year government bonds than South Africa (8.9%) – Venezuela and Brazil.
With rates that high, financial markets are bound to be buoyed by speculative “hot money”. South Africa has the power to stop this from happening.
It could, for example, penalise corporations and wealthy residents for taking money out. A similar arrangement, known as the “fin rand”, existed between 1985 and 1995.
Capitalism’s greatest-ever economist, John Maynard Keynes, insisted that under circumstances of global financial volatility and economic stagnation, not only should exchange controls be imposed, localised production and greater state spending will be necessary to overcome the private sector’s unwillingness to invest.
The danger everyone recognises, though, is that if Zuma’s new team did abandon fiscal austerity, it would not use additional resources wisely to support economy, society and environment: higher social grants, university tuition, basic- needs infrastructure, reduction of women’s burdens, or a climate justice transition are but a few examples.
In any case, Gigaba has committed to continuing the austerity drive.
He aims to lower the 2019 budget deficit to 2.6% of GDP: “I will work within the fiscal framework as agreed by government and Parliament. There will not be any reckless decisions,” he has said.
The problem for South Africa is that a mild-austerity fiscal framework was tried by Gordhan and failed to restructure the economy or boost growth.
Most neo- l i berals supporting austerity are expressing schadenfreude – happiness at someone else’s misfortune – because the downgrade is a good stick with which to whip Zuma. They aren’t particularly concer ned about economic transfor mation, poverty or racial inequality.
Nor is Zuma apparently concerned about the economic risks the downgrade has just imposed on all South Africans – his first priority is political survival. In the days ahead, an ideological debate is desperately needed to sort out society’s options.
But the debate will need to transcend the current quagmire caused by both Zuma’s corruption and National Treasury’s capture by the ratings agencies.
Bond is professor of political economy at the University of Witwatersrand.