Hands off Gordhan or land on the junk heap

Rating agencies tell business independent institutions are key to avert downgrades

THE political situation in South Africa is not precarious enough to prompt international credit rating agencies to cut its ranking to junk.

But if political developments destabilised economic growth or derailed the Treasury’s fiscal consolidation — factors that the agencies have previously cited when rerating South Africa — the risk of a downgrade would be heightened.

About 90 CEOs, led by Business Unity South Africa president and Telkom chairman Jabu Mabuza, who have been working with the government and labour said on Friday they were making progress with several programmes aimed at stimulating growth, particularly through investment, while staving off a costly downgrade.

Rating agencies have stressed in consultations with business leaders that transparent, independent and impartial institutions were important to sustainable economic growth.

The country’s ratings are on the brink with both S&P Global Ratings and Fitch ranking the country at BBB-, just one notch above subinvestment grade.

S&P officials were in South Africa this week to meet various stakeholders before announcing on June 3 whether they will downgrade the country’s credit rating to subinvestment grade.

Their visit coincided with claims in the media that Finance Minister Pravin Gordhan could soon be arrested for setting up an allegedly illegal investigative unit when he was head of the South African Revenue Service. Although the media reports were later denied by the Hawks, the damage was done: the rand weakened on the news.

Treasury director-general Lungisa Fuzile met S&P officials this week and said it was hard to tell what they made of the political turmoil involving the finance minister as they only asked PROGRESS: Jabu Mabuza him standard questions about reaching economic growth targets and fiscal objectives.

Had S&P officials asked questions of a political nature, he would have pointed them to his bosses, Fuzile said, as political issues were “not my terrain”.

Reserve Bank governor Lesetja Kganyago, who also met S&P this week, is also concerned about political uncertainty given the volatility it causes in the rand. Monetary policy is harder to conduct in an environment of a volatile rand exchange rate as it brings uncertainty to indicators such as the inflation outlook.

Maintaining an investment grade rating required protecting credit metrics on matters such as institutions, policy framework and economic performance, Kganyago said on Thursday.

“The narrative that we’ve got to be carrying in order to protect our credit rating is to look at our metrics and say: where are the weaknesses . . . and what decisive steps do we take to make sure that our credit metrics improve or do not deteriorate?” he said.

“I believe that we have taken significant steps to deal with the concerns that have been raised by the rating agencies.”

Nedbank economist Isaac Matshego said: “At this stage I do not believe that the rating agencies will respond negatively to recent reports, but of course their stance is likely to change if these hurt business confidence further.”

He added: “I have to be clear that I do not believe that the issue is about Pravin Gordhan in his personal capacity, but it is more about a commitment to transparent governance.”

Pan-African Capital Holdings CEO and economist Iraj Abedian agreed that politics alone were unlikely to lead to a rating downgrade, but warned: “If the balance of forces grows against the finance minister and his paradigm and he has to leave the position, then I have no doubt that a downgrade will follow.”

Business leaders welcomed statements by the Hawks and the Presidency dismissing the Gordhan arrest reports, saying officials had confirmed that the justice system was not being used irregularly, unfairly or for political purposes.

S&P in April commended the strength of South Africa’s institutions but raised concern over low economic growth. At the time, S&P MD and sub-Saharan Africa regional manager Konrad Reuss said calls to accelerate structural reforms were “easily drowned out by all of the political noise and raging political battles”.

Some of the measures adopted from a partnership between the government, business and labour include a private sectorled R1.5-billion entrepreneurship fund to provide equity to high-growth small and medium enterprises.

Moody’s two weeks ago left South Africa’s rating unchanged at Baa2 — two notches above subinvestment grade — but with a negative outlook.

Although Fitch said there were no “pre-announced rating dates”, it is expected to release its review on South Africa next month.