South Africa is digesting the news of Standard & Poor’s (S&Ps) downgrade of its state debt held in foreign currency following President Jacob Zuma’s March cabinet reshuffle. As the country deals with that blow, two other credit rating agencies (Fitch and Moody’s) will soon hold forth.
Even if these agencies’ biases and competence should be questioned, it’s likely that further downgrades will lead to a meltdown of the currency.
This scenario would mirror the events of 1985 when then President PW Botha delivered his crazed Rubicon Speech which caused a $13 billion default. The foreign debt/GDP ratio hit 40%. Today it is nearly 50%. Botha was compelled to impose exchange controls.
As Zuma goes for broke, the main task ahead for South Africans is to renew the ideological debate over how to protect the currency and kick-start the economy – sensibly and without corruption.
The National Treasury and South African Reserve Bank could initiate a long overdue era of redistribution, racial justice and radical economic transformation. They would need to impose tighter exchange controls to protect the currency, lower interest rates, harness the power of state owned enterprises but without the recent corruption, and increase strategic state spending.
The new Finance Minister Malusi Gigaba promised to pursue at least one of these at his first press conference after being sworn in. He said that one of his key focus areas would be to accelerate “radical economic transformation”. Cynics might point out that he made his comments on April Fool’s Day.
State owned enterprises
Similar false promises of transformative infrastructure left the country disappointed during Gigaba’s role as Minister of State Enterprises between 2010 and 2014. Instead, he bought into the mania for mega-projects which either didn’t work or rewarded carbon-intensive multinational corporations:
PetroSA’s R80 billion Mthombo refinery.
World Cup stadiums now recognised as white elephants after initial assurance they would not be. Thankfully one of Pravin Gordhan’s last acts as Finance Minister was to halt the ridiculous R6.4 billion Durban 2022 Commonwealth Games.
Sports events aside, these mega-projects are mainly the foibles of state-owned enterprises which S&P singled out on Monday as its second reason – after political hijinks – for the rating downgrade.
Of particular concern are government guarantees used to underwrite public enterprise liabilities which the rating agency forecasts will reach R500bn by 2020.
If instead of mega-projects, Eskom and Transnet built renewable energy and cheap commuter rail transport, for example, radical economic transformation would make South Africa much more sustainable. But that would require a 180-degree turnaround.
Why South Africa needs exchange controls
Since Zuma won’t reverse either the cabinet reshuffle or his patronage tendencies, tighter exchange controls are the only way to prevent a debilitating raid on the currency.
Once two rating agencies downgrade South Africa’s local currency debt, the country will be dropped from the Citibank’s World Government Bond Index. As Sygnia’s Magda Wierzycka warns:
If our rand-denominated debt is rated as junk by S&P and Moody’s, South Africa will be dropped from the index. Immediately on that happening, approximately $10-billion, or R137-billion, will flow out of the country.
That could tempt the South African Reserve Bank to rapidly raise interest rates to protect the rand and restore financial inflows. Higher rates give investors a return needed to offset risk. It has taken drastic action like this before. In 1998 Governor Chris Stals raised rates by 7 percentage points within two weeks, as the currency crashed from R7/$ to R10/$.
Instead, a different strategy is needed to deter financial predators and gain the space to lower interest rates: tighter exchange controls.
South Africa already has some in place. Pension funds and other institutional investors must retain 75% of their assets in the domestic market. By all accounts this saved South Africa during the last financial meltdown in 2008.
But more controls are needed. Foreign financiers are a fickle group. French bank Societe Generale, for example, recently increased its rand assets in search of high interest rates. Currently only two countries are paying more on 10-year government bonds than South Africa (8.9%) – Venezuela and Brazil.
With rates that high, financial markets are bound to be buoyed by speculative “hot money.” South Africa has the power to stop this from happening. It could, for example, penalise corporations and wealthy residents for taking money out. A similar arrangement, known as the “fin rand” existed between 1985 and 1995.
Well-directed state spending
Capitalism’s greatest-ever economist, John Maynard Keynes, insisted that under circumstances of global financial volatility and economic stagnation, not only should exchange controls be imposed. Localised production and greater state spending would be necessary to overcome the private sector’s unwillingness to invest.
The danger everyone recognises, though, is that if Zuma’s new team did abandon fiscal austerity, it would not use additional resources wisely to support economy, society and environment: higher social grants, #FeesMustFall on university tuition, basic-needs infrastructure, reduction of women’s burdens, or a climate justice transition, as a few examples.
In any case, Gigaba has committed to continuing the austerity drive. He aims to lower the 2019 budget deficit to just 2.6% of GDP:
I will work within the fiscal framework as agreed by government and parliament. There will not be any reckless decisions.
The problem for South Africa is that a mild-austerity fiscal framework was tried by Gordhan and failed to restructure the economy or boost growth.
Most neoliberals supporting austerity are expressing schadenfreude – happiness at someone else’s misfortune – because the downgrade is a good stick with which to whip Zuma. They aren’t particularly concerned about economic transformation, poverty or racial inequality.
Nor is Zuma apparently concerned about the economic risks the downgrade has just imposed on all South Africans - his first priority is political survival.
In the days ahead, an ideological debate is desperately needed to sort out society’s options. But the debate would need to transcend the current quagmire caused by both Zuma’s corruption and National Treasury’s capture by the ratings agencies.