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SA should brace for worst case scenario, says expert

Politics

Johannesburg - With another rating's agency downgrading South Africa's sovereign debt to "junk status" on Friday, a senior economist has called this downgrade "disastrous" for the country's economy.

Chief economist at the SA Institute For Race Relations, Ian Cruickshanks, was reacting to Fitch Ratings following Standard & Poor's's queue in putting South Africa's sovereign rating to sub-investment grade, or junk statement.

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The Johannesburg Stock Exchange in Sandton City. File picture: Timothy Bernard

Fitch cited in a statement the recent cabinet reshuffle as the reason for the downgrade, sayingthese events will "weaken standards of governance and public finances".

"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 out-going finance minister to improve the governance of state-owned enterprises (SOEs). The reshuffle is likely to undermine, if not reverse, progress in SOE governance, raising the risk that SOE debt could migrate onto the government's balance sheet," the agency stated.

Cruickshanks contended that this downgrade would make it difficult for South Africa to access foreign capital, and may result in the SA Reserve Bank (Sarb) hiking interest rates.

Read the full statement from Fitch here

"Sarb could raise interest rates by as much as 2% in no time because it will have to protect capital outflows. This is the worst case scenario; but we live in South Africa, and worst case scenarios usually come to fruition," he told Independent Media.

"If the US follows through on its intention to tighten monetary policy and hike interest rates there, we will have to raise ours by twice as much because the dollar is a more favourable buy for investors."

Cruickshanks added that the downgrade will also be detrimental for the weekly bonds that Treasury issues to foreign investors, saying these bonds will now be "unattractive to foreign investors".

Treasury said in a statement in response: "The announcement by Fitch is noted by government and while it is a setback, government remains committed to making sure that its work with business, labour and the civil society continues in order to improve the business confidence and implement structural reforms to accelerate inclusive economic growth."

The rand has remained relatively stable following the news, staying at R13.78 at 15:06, after an opening trade R13.76; according to Bloomberg Markets.

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The Star

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