‘Instability will hasten downgrade’

THE POLITICAL instability in the country would make it easy for ratings agencies S&P Global and Fitch to downgrade South Africa to junk status when they announced their decision in December, Momentum economist and researcher Johann van Tonder said in an interview with Business Report.

A downgrade to junk status will make it more expensive for the country to borrow funds.

Van Tonder said the trouble that Finance Minister Pravin Gordhan was having with the National Prosecuting Authority (NPA) would hurt the country economically if it was not resolved before the agencies’ decision at the end of the year.

Markets are tracking the fraud case against Gordhan and ratings agencies have previously warned that South Africa’s politics may interfere with economic policy.

Gordhan is presenting the medium-term budget policy statement next week. Squabbling “The spat involving… Gordhan and the (NPA) can do a lot of harm for the country in the eyes of potential investors and the rating agencies.

“If the finance minister is removed from office then chances are that the country will get a downgrade.

“This is a clear example of how political instability can cause serious harm to the economy. Political leaders must think hard before making decisions. We don’t need political squabbling and to create uncertainty because markets want a stable environment to operate,” he said.

However, Van Tonder said, politics aside, South Africa did not deserve to be downgraded.

“We don’t deserve a downgrade on the basis of the non-performance of our economy. We had a severe drought over the last two years, which was beyond our control.

“The drought had a devastating effect on our economy and if you add the power cuts of 2015, there is no way any country in the world wouldn’t have been affected by those two occurrences,” Van Tonder said.

With a stable electricity supply this year, Van Tonder said he expected the economy to do better than the 0.2 percent economic growth for 2016.

“Enough power supply will alleviate a lot of pressure in the system. The drought is showing signs of coming to an end and with those two occurrences behind us we can expect the economy to grow by between 1 percent and 2 percent in the next three years,” he said. Negative outlook In June, South Africa avoided a downgrade from S&P Global and Fitch rating agencies. But the agencies maintained their negative outlook on the country. S&P held the country’s sovereign debt rating at BBB- but warned about the consequences of low economic growth.

“The government hasn’t defaulted in paying its debts and I don’t understand why we should be considered for a downgrade. It seems as if agencies don’t look at these two issues, which I think are very important in making their decisions whether to downgrade or not,” Van Tonder added.

If South Africa was downgraded, he stressed that it would be difficult for ordinary citizens, the government and businesses to survive.

“We would enter in a period of high-inflation, poverty, high interest rates and higher borrowing costs. We won’t be in a position to create employment and the businesses will suffer.”