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Nicola’s Notes: #Junkstatus, Now what?

Opinion

I suppose we shouldn’t be surprised that S&P moved early and downgraded SA to junk. What remains to be seen is just what effect this will have on ordinary South Africans.

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Nicola Mawson. Picture: Matthews Baloyi

S&P was only meant to re-examine SA’s credit rating on June 2, and – we all hoped – by then the dust would have settled somewhat after President Jacob Zuma’s shocking – but not surprising – Cabinet shuffle.

That reshuffle, not that it bears repeating, saw Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas axed, to be replaced by Malusi Gigaba – who came from home affairs – and the relatively unknown Sfiso Buthelezi, previously an ANC lawmaker.

We all expected Gordhan to go – it was hardly the government’s best kept secret.

However, just how much store the international investment community puts in him can be seen by the rand’s reaction – tanking as much as 6 percent.

And this, S&P says, is the top line reason as to why it downgraded SA now. It is also concerned about Eskom, but those have been an issue for some time.

In its statement on Monday, the international rating agency – the other two big ones being Fitch and Moody’s – says “the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes”.

Read also: 'Executive changes' risk growth – S&P

South Africa, as we all know, is battling to grow. The economy staggered in at a mere 0.3 percent growth last year and, in his last budget, Gordhan said it would reach 1.3 percent this year.

Hardly the sort of growth that creates jobs – which spins into more growth – bolstering investment, allowing us to pay down debt and – like compound interest – creates more jobs.

So S&P will be worried that, if we don’t grow the economy at a meaningful pace, we can’t pay our debts – in a scene somewhat reminiscent of Greece, which had to be bailed out a few years ago.

That was a global mess, although it thankfully really didn’t affect us that much.

Spill over effect

Whether one agrees with ratings agencies or not, this will affect us.

Moody’s – which has SA two notches above junk – will rate us later this month, and I expect Fitch to follow shortly.

The trick with ratings agencies – right or wrong – is that the international investment community looks to them as yardsticks for where to put their money.

Not many of us have that much of a risk appetite that we’d invest in “junk”, I know I wouldn’t.

As a result, what we can expect is the rand to tumble some more, which means buying anything from overseas will be more expensive. That covers a multitude of items – from fuel to what you fill your shopping trolley up with each month because we just don’t have enough of manufacturing capacity anymore.

Clothes? More expensive. Plastic items? More expensive. Shoes? More expensive.

Read also: Economy straggles in at 0.3% growth in 2016

True, this isn’t a blanket statement, and there are Proudly SA items we can benefit from, and a weaker rand will boost exports.

However, look at the source on the label of the next item you buy – it’s going to get more costly. That’s because international investors will move money away from riskier countries, like we really are now according to S&P, and into safer places.

They’ll move away from the rand – and into dollars. Bonds, thankfully, may survive.

It also means we won’t see economic growth ticking up anytime soon. Because foreign investors will want to build where ratings agencies haven’t run such alarming warning bells.

A case in point is Nokia. It went to junk, and went bang, and its shares were worthless – even if it brings old faithful back – it’s still not seen as a safe bet by many.

And the very sad upshot – in a kind of Kafkaesque manner – is that S&P’s concerns about our stagnating economic growth will lead to a further slowdown.

And that’s bad news for a country that badly needs to create jobs if it’s to implement radical economic transformation.

BUSINESS REPORT ONLINE

 

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