This has been called the calm before the storm by some. Despite the events at the end of March when first Finance Minister Gordhan was recalled from his investment road show tour of the UK and then the subsequent cabinet re-shuffle, followed by the downgrades from two ratings agencies, the local currency and stock market have remained remarkably buoyant.
The Rand has not collapsed as many thought it would. Although it has depreciated some 7% against the USD since the recall, it is still up some 13% since December 2015 when Minister Nene was dismissed.
The JSE All Share has strengthened by nearly 4% since December and this compared to 1.6% from the MSCI world index is really good news. Meanwhile the gold price, on the back of considerable global uncertainty, has only improved by about 2%.
To add to the perceived sense of relative stability, SA has managed to get back into the Foreign Direct Investment Confidence Index for the first time in 2 years. Foreign inflows remain positive but for how long will this be the case?
The threat of further downgrades persist, of course. Moody’s is yet to make a determination and quite clearly if SA’s local currency debt is downgraded then we will see outflows with a corresponding weakening of the currency. Interest rates are likely to be increased and the general cost of living will rise. A recession , no doubt, looms.
If we are facing the reality of full scale junk status, does this mean the end of the world? Not at all is the answer but it does depend considerably on how government responds and what measures it demonstrably puts in place to counter the new situation. Plans for excessive and unaffordable expenditure on items such on-going bail outs for SOEs and the nuclear project will be closely watched.
At present there is so much noise revolving around “State Capture”, “Radical Economic Transformation” and “White Monopoly Capital” that it is difficult to see any real positive steps being taken to counter our newly acquired junk status. Compounding this is the fact that our new Minister of Finance still has to find his feet – so it is a case of early days perhaps. All eyes are currently on the World Economic Forum Africa meeting and in particular what messages Minister Gigaba is likely to give particularly with regard to Radical Economic Transformation and what precisely that means in plain language.
The focus has to be on promoting proper economic growth through the creation of investor friendly politics and not solely on the politics surrounding SA’s president and the build up to the ANC’s elective conference in December. Clearly SA cannot take its eye off the economic ball at this critical moment.
Junk status must be seen as an opportunity for urgent remedial action to be put in place. Investors will then see that as a golden opportunity to focus on South Africa despite its recent record of below par growth, high unemployment, business unfriendly policies and now downgrades.