'Allow Gordhan to do his job to prevent economic decline'

Finance Minister Pravin Gordhan. File picture: Siphiwe Sibeko

Finance Minister Pravin Gordhan. File picture: Siphiwe Sibeko

Published Aug 27, 2016

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Johannesburg - If Finance Minister Pravid Gordhan is unable to complete his term of office, the South African economy will spiral sharply downwards, according to Investec Bank Limited chief economist Annabel Bishop.

This follows the latest reported threats this week by the Hawks to arrest Gordhan on what appear to be trumped up charges.

“The past week has proved very volatile, with the rand opening at R13.45/USD, R15.20/EUR, and R17.57/GBP on the general risk-on sentiment towards EMs [emerging markets] since the latter part of May, then plummeting to R14.32/USD, R16.17/EUR, and R18.79/GBP on the unexpected news that Finance Minister Pravin Gordhan could be criminally charged,” Bishop said in a statement.

Portfolio flows unsurprisingly proved choppy, as foreigners bought R0.8 billion worth of SA equities and R2.8bn worth of bonds (both net of sales) on Monday and Tuesday, then sold net R2.0bn worth of SA equities and R0.4bn of bonds net (both of purchases) in reaction to the news over Wednesday and Thursday.

“If Finance Minister Gordhan is unable to complete his term, and his replacement is not seen as able to deliver the degree of fiscal consolidation required, the rand could weaken towards R19.00/USD and R25.00/GBP as foreigners offload SA portfolio assets (with up to 40 percent of these bonds and equities estimated to be held by non-residents),” she said.

If credit rating agencies believed that the degree of fiscal consolidation currently outlined in the budget for the next few years was at a real risk of not materialising then it became very likely that South Africa's credit rating would drop to speculative grade.

A sub-investment grade credit rating, which raised the country's cost of borrowings, would then make it likely that further credit rating downgrades could ensue.

“The risk then is that a downward spiral develops, where higher borrowing costs, and rising fiscal debt ratios to GDP result in a further deterioration in government finances, leading to the extreme down case of a sovereign debt default. In such a situation, the rand would likely move towards R30.00/USD and R40.00/GBP.

“It is perceptions of the future creditworthiness of a country's finances that count for the rating agencies, and so it is the current conduct of a country's government that is used to form judgment on this future creditworthiness,” Bishop said.

African News Agency

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