Careful wooing comes to a painful end
Inever thought I would hear a South African finance minister being asked by a journalist why he lied to the public. But that was the question Malusi Gigaba faced on Tuesday at a media briefing (a two-hour endurance test, replete with long and obfuscatory answers to simple questions, that began almost three hours late).
Gigaba, as it turned out, was given notice by S&P Global Ratings on Friday morning — confidentially, as is the norm — that the agency was going to downgrade SA.
He and his team decided it wasn’t even worth arguing with S&P, but that didn’t prevent him answering questions about ratings at media briefings on Saturday and Monday, ahead of Monday night’s downgrade to junk status. He certainly suggested SA’s ratings weren’t going to be downgraded; whether what he actually said amounted to misleading the market is something lawyers will perhaps be looking at.
As striking is S&P’s speed in taking action, deviating from its schedule, to jump in straight after President Jacob Zuma reshuffled his Cabinet on Thursday night. Chances are that it came very close to downgrading us last time, but ousted finance minister Pravin Gordhan is believed to have spent hours persuading the agency not to act in December.
On the economics of it, SA should probably have been downgraded some time ago. Each agency tends to have its own emphasis and S&P’s is the per capita economic growth rate, which in SA’s case has been negative for the past two years, with the agency forecasting negative per capita growth again this year. In dollar terms, SA was already out of line with its investment-grade peer group on per capita income and only the fact that growth was seen edging up was keeping us at that grade — despite our dodgy state enterprises and rising public debt levels.
But ratings agencies look at a list of factors; for all the focus on metrics, the feel matters too. Working with the CEO Initiative, and with labour and other leaders, Gordhan spent the 16 months since the Nenegate disaster weaving a careful narrative and sharing this in many and frequent interactions with ratings agencies and investors.
It wasn’t a crude narrative about the wonders of SA or of Gordhan himself, but a more nuanced one in which agencies and investors were encouraged to view the business-labour-government collaboration as a ratings positive in itself and were urged to look through the “noise” of the political dramas.
SA’s vibrant democracy and the (often very noisy and scary) contestation within were good signs, not bad ones, as was the strength of institutions such as the courts and public protector. The agencies were concerned about the instability leading up to the electoral conference in 2017, but were apparently persuaded, more or less, that if SA could hold out until Zuma’s ANC presidency ended, anyone else would be better.
Moody’s, which has placed the most emphasis on institutional strength, was enthusiastic about the 2016 local government elections and the potential they had to bring about more market-friendly policies in the medium term.
And though all the agencies have constantly expressed concerns about political infighting and the potential to derail policy reforms, they seemed, at least by December, to have been persuaded and cajoled to wait for a better economy — and better politics.
All that fell apart on Thursday night, when Zuma prevailed. Gigaba either didn’t know or didn’t care about the careful teamwork that went into all those interactions with the ratings agencies. He met Gordhan on Tuesday, only after the downgrade. It turns out he had planned to meet with “stakeholders” such as the CEO Initiative only next week. He seems to have raced off (telephonically) to reassure Fitch and Moody’s (but not S&P) on Friday that he was a really good guy and that a change of finance minister, whatever the fraught circumstances, was no reason for a downgrade. Whether he took any advice on how to talk to them is not clear.
The nuances of the S&P report, and the Moody’s report in which it put SA on review for a downgrade late on Monday night, show just how sharply trust turned to scepticism. S&P talks of the risk of policy shifts that will put growth and fiscal numbers at risk. And while it was persuaded in December by the package of reforms to state-owned enterprises, now it says it does not foresee these being implemented anytime soon. The agency is no longer so confident about the accord between business, labour and the government that helped to persuade it last time. Moody’s, in turn, is now expressing concerns about those institutions whose strength was such a plus. Its report, remarkably, talks about rent-seeking, with scepticism about prospects to “remove structures that encourage rent-seeking over achievement of public policy goals”.
The big question is what happens next. One junk rating is not so bad; two or three is very bad. The Fitch and Moody’s decisions are yet to come and, quite apart from the cabinet reshuffle itself, Gigaba’s performance and pronouncements do not inspire confidence.
The real risk is that one downgrade to subinvestment grade could be followed by more, because it could prompt a vicious spiral in which money becomes more expensive and the rand slides, inflation and interest rates go up, the economy’s growth comes down, budgetary pressures rise and SA slides down the subinvestment grade ratings scale, as others — such as Brazil — have done.
Without a political turnaround, and soon, it could be a long road back to investment grade.
OUSTED FINANCE MINISTER PRAVIN GORDHAN IS BELIEVED TO HAVE SPENT HOURS PERSUADING THE AGENCY NOT TO ACT IN DECEMBER