How to survive junk economy
THE decision by ratings agency Fitch to downgrade South Africa to junk status is nothing to panic over, says former Cosatu economist Neva Makgetla.
“Is it a bad thing? Yes, it is. Is it the end of the world? No, it’s not,” she said.
“What these agencies are doing is using these downgrades to hit President Jacob Zuma over the head with.
“Where the downgrades will hurt is in the area of US pension funds investments.
“They are not allowed to invest in countries that have junk status, which means they cannot invest in, say, Eskom.”
The other problem with the downgrade, Makgetla said, is it will push up the exchange rate.
A far bigger concern, she believes, is the issue of good governance in the treasury – and an inexperienced minister will not inspire confidence.
National Treasury described the downgrade as a setback, but insisted the government would stick to fiscal consolidation.
“Government remains committed to making sure its work with business, labour and civil society continues in order to improve the business confidence and implement structural reforms to accelerate inclusive economic growth,” it said.
The Banking Association of SA said it was devastating.
“The fact that Fitch has directly attributed its downgrade to the actions of the president demonstrates in no uncertain terms the broad assertion that the reshuffle, although his prerogative, was not in the national interest,” said managing director Cas Coovadia.
Economist Dawie Roodt also advised South Africans not to panic.
He said the downgrade would have minimal effect on an average consumer in the short-term.
He told Independent Media that the rating just meant that South Africa was not seen as an investment destination.”
Fitch was the second rating agency after Standard & Poor’s to downgrade South Africa’s sovereign debt to sub-investment grade this week.
SA Institute for Race Relations chief economist Ian Cruickshanks called the downgrade “disastrous”.
He said it would “weaken standards of governance and public finances”.
In a statement, Fitch said: “In Fitch’s view, the cabinet reshuffle, which involved the replacement of the finance minister, Pravin Gordhan, and the deputy finance minister, Mcebisi Jonas, is likely to result in a change in the direction of economic policy.
“The reshuffle partly reflected efforts by the outgoing finance minister to improve the governance of state-owned enterprises.
“The reshuffle is likely to undermine, if not reverse, progress in SOE (state-owned enterprises) governance, raising the risk that SOE debt could migrate onto the government balance sheet.”
Cruickshanks contended that the downgrade would make it difficult for South Africa to access foreign capital, and may result in the Reserve Bank (Sarb) hiking interest rates.
“Sarb could raise interest rates by as much as 2% in no time because it will have to protect capital outflows.”
The CEO Initiative described the downgrade as another blow to all South Africans, who they said “will pay the price of these actions for many months to come”.