Ratings threat reveals the upside of danger
THE president is right. There is something deeply suspicious about all four of the big banks withdrawing their services from the Gupta family firms in the same week as audit firm KPMG ran screaming from its contractual obligations. I do, however, suspect the president is barking up the wrong tree in his attempt in parliament this week to sniff out a conspiracy.
The explosive October affidavit filed by Finance Minister Pravin Gordhan justifying his decision to not meddle in the commercial decisions of independently regulated financial institutions pointed to some R6.8-billion in suspicious transactions.
The president again this week threatened a commission of inquiry into the banks. One wonders how that would go down at a Friday knees-up at the Saxonwold shebeen.
All of this is a sideshow to the real issue South Africa faces right now. The country sits like a death-row inmate appealing for clemency as the execution date nears, hoping against hope for a reprieve from a ratings downgrade.
Friday is D-day for S&P Global Ratings, the agency closest to triggering South Africa’s steady slide to junk.
If we manage to pass the test, it will have followed weeks of frenetic cramming. There have been minor revisions to labour policy, interventions in the power mix with the Department of Energy finally seeing the sense in postponing the adoption of an aggressive nuclear strategy. There have even been positive noises emerging about the progress the new board at SAA is making with the help of Bostonbased consultancy Bain.
Bizarrely, the threat of a downgrade is turning out to be positive for the country. While it’s deeply unsettling, it’s providing a useful crisis for the finance minister to use to drive changes through a divided crony cabinet with selfinterest higher on the agenda than sustainability.
Fortunately for us, Gordhan, like South Africa, tends to perform best in crisis mode. While the world frets about the consequences of a Trump presidency in the US and what it means for global trade, South Africa once again is likely to be handed the gift of time to bring itself back from the brink.
There is a common misunderstanding about the ratings decision. If S&P pushes South Africa’s foreign-denominated debt to sub-investment grade, it will be a negative, but in itself not a disaster. It takes a downgrade by two agencies before a country is classified as junk, although it does make a full-blown deterioration almost inevitable.
About 10% of government debt is in foreign currency. The rest is in rands. What is most at stake this week is a judgment call by S&P on whether we can continue to service that foreign debt five years from now. Our rand debt is two notches above junk.
So much depends on politics. Whether the constitution is robust enough to withstand continual assaults, whether the courts that guard its sovereignty are showing their muscle, whether there is real intent to clamp down on corruption and ineptitude in the public sector.
Disaster will strike if and when ratings agencies downgrade randdenominated debt. That would be the ultimate vote of no confidence in our ability to service our obligations. If S&P does downgrade our foreign debt one more notch, it won’t trigger a forced exit for global funds out of the bond market. As things stand, international investors are mandated to invest a portion of their customers’ money in all constituents of the Citi Global Bond index. That would change only if a series of downgrades were triggered.
Ratings agencies, however, will be cognisant of the fact that the president seems hell-bent on any excuse to sack Gordhan. A downgrade might provide the reason and that would trigger a certain slide into the financial abyss. That might temper their actions, too.
Whitfield is a public speaker on the political economy and an awardwinning financial journalist