The last bastion
The team from Standard & Poor’s (S&P) are looking out of a vast picture window at the Johannesburg Stock Exchange across a bustling Sandton. There are at least a dozen cranes on the horizon.
The European executives are in SA to finalise their ratings view on the country. S&P has ranked SA on the bottom rung of the investment grade ladder with a negative outlook. One more downgrade and the country will be junk-rated.
From the window SA doesn’t look like a sub-investment grade country — except that it already is.
Financial markets have already decided that SA deserves to be in the same junkratings basket as Brazil, Russia and Turkey, according to credit default swap (CDS) spreads (see graph, “In bad company”).
In fact, SA — with a CDS spread of 305 — is perceived to be more risky than Turkey, on 262, and a whisker away from Brazil (315) where the president is being impeached and the economy is in deep recession.
In polls, economists agree overwhelmingly that SA will lose its investment-grade status this year — and this was before reports last week of finance minister Pravin Gordhan’s “imminent” arrest over an alleged “rogue unit” at the SA Revenue Service (Sars) when Gordhan was tax commissioner.
The timing, on the eve of S&P’s visit and Fitch’s final assessment of the country, could not have been more disastrous. Not just because the rand lost 45c against the US dollar in the space of a few days but because Gordhan and national treasury have become SA’s last bastion of defence against the looting of public money. Without Gordhan there is also a strong likelihood that the nascent reforms he has spearheaded over the past six months, to put the country on a faster growth path, will unravel.
Bottom line: treasury’s track record of fiscal discipline and the promise of faster structural reform is all that stands between SA and the junk heap.
Speaking to the Financial Mail this week, Gordhan said the ratings agencies appear to have heard SA’s message. “We have a case to sell, and it’s a good case — warts and all. On the strict fiscal matrices, we’re on a very strong footing. Of course, we have to consider deep structural challenges, but we’ve made huge progress in four months.”
It’s true that Gordhan’s first six months in office have been remarkable, not only for SA Brazil the urgency with which he has set about trying to repair SA’s investment credentials, but also the new compact between government and business. For the first time, the likes of Telkom chairman Jabu Mabuza, JSE CEO Nicky Newton-King and Barclays Africa chair Wendy Lucas-Bull are standing alongside Gordhan, presenting a united front against a potential downgrade.
Gordhan said the meetings with the agencies went well, even if he has no real idea whether they’ll downgrade SA in June.
“We gave them exposure to a wider range of people. Previously, they’d only meet analysts or certain businesses. Now they’ll meet Jabu Mabuza and others. So it’s not us as government saying something, the agencies are meeting these people,” he says.
This “higher level of trust” between business and government will have given the ratings agencies confidence, he added.
But this wasn’t their only concern. Other worries include the state of SA’s labour market, the parlous performance of state-owned companies like SA Airways (SAA) and the tougher issue of where SA’s economic growth will come from. “It’s the classic question we were asked in London and New York too: what will you do if growth remains low? In other words, what will you do to achieve your deficit target (of 2.4% by 2018/2019)? So we have eight options, which extend all the way from a general haircut on spending, compensation of state employees, all the way to cutting spending on capital projects,” he said.
On the specific issues of state companies, Gordhan said treasury had laid out specifics of how this is being addressed, from details of the planned merger of SAA and SA Express to how companies like Eskom can make better use of gov-