While politicians and political analysts will focus on the results of Wednesday’s polls, a more important issue for other South Africans and for offshore investors will be the composition of the next ANC cabinet.
While an unexpected electoral result could be an early sign of future power shifts in the country, it will be the newly appointed key ministers who determine government policy over the next few years.
A line-up of incompetents will condemn South Africans to another five years of going nowhere in slow motion – at best. And a collection of cronies, clowns and well-known crooks won’t go down well with the international investment community. Contrary to the perceptions of the party’s left wing, foreigners provide a vital input to the economy – money.
There isn’t enough domestic capital to fund a strong expansion of the economy, and without foreign capital the economy can’t thrive.
There are consequences to putting political considerations ahead of economic priorities or relying on short-term measures to boost growth. Over the past two months, two of South Africa’s Brics partners – Russia and Brazil – have had their credit rating cut from BBB to BBB- by Standard & Poor’s (S&P), leaving them one notch above junk bond status. The other two partners – China and India – have not come under attack recently, though India is one step above sub-investment grade. China is safely in investment territory.
In the case of Russia, S&P said: “The tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects.”
Brazil’s government, which faces an election in October, has been accused of resorting to ad hoc stimulus, like boosting bank lending to address slow growth.
A week after Wednesday’s election, South Africa will get a useful insight into its prospects when Moody’s Investors Service holds its annual sub-Saharan Africa credit risk conference in Johannesburg. Moody’s was the first rating agency to give the country an investment grade rating, and the first, after the transition to democracy, to cut the country’s sovereign rating in September 2012. S&P and Fitch followed soon after.
South Africa is still cushioned from junk bond status: BBB from S&P and Fitch, one notch above the lowest investment grade; and Baa1 from Moody’s, two notches higher than the bottom rung.
The lower a country’s credit rating, the higher the interest creditors expect when they lend money. This is potentially serious for a country like South Africa, which also faces rising government debt – from R1.8 trillion this year to a projected R2.2 trillion in two years’ time. A higher debt bill means government has less money to spend on other needs and potentially it also means higher taxes.
The election outcome is not likely to influence rating agencies one way or another. The fact that four national elections have already taken place peacefully and credibly is regarded as one of the country’s institutional strengths. And the fifth election is likely to confirm positive perceptions of the electoral process.
The immediate danger to South Africa’s status among global investors will come if the finance minister fails to inspire confidence. The incumbent, Pravin Gordhan, and his predecessor, Trevor Manuel, are highly regarded at home and abroad. Manuel has already withdrawn from politics. And if Gordhan is replaced and his successor is not in the same mould, the government will be off to a shaky start.
Three years ago Kristin Lindow, the lead analyst for South Africa’s sovereign rating at Moody’s, sounded the first warning about rising debt. And only Gordhan’s determined efforts to keep fiscal policy on track averted a second credit downgrade.
Rating agencies will also be alert to signs that the National Development Plan (NDP) has been put on a backburner. In March, Moody’s noted: “Macroeconomic policy formation in South Africa is coherent, and monetary and exchange rate policies as well as fiscal policy are well integrated and credible.” As an example, it cited the ANC’s endorsement of the NDP at its leadership conference in December 2012.
However, it noted also the opposition to the NDP from the alliance partners, Cosatu and the SACP. Signs that this opposition has influenced the choice of cabinet will trigger alarm bells among all the rating agencies.