Pretoria - With ratings agency Moody’s expected to visit South Africa this week for a possible credit downgrade, experts have warned of tough economic times should the country slide into junk status.
They say the looming downgrade would spell disaster for consumers, who would have to pay more for servicing their debts. The experts have warned of possible interest rate hikes, which would result in soaring food prices, high unemployment levels and more protests.
Read: Moody's team set for SA mission
The grim situation would affect investor confidence, making investors more sceptical about South Africa as a viable foreign investment destination.
The government might find itself with little money to spend on social services as it would be servicing its high debts incurred from borrowing money at high interest rates, analysts said.
Wits Business School Professor Eric Schaling said the situation would cascade down to consumers because the government would increase interest rates in order for it to manage its international debts. Schaling forecast that Moody’s could release its report on South Africa some time around June.
Wits University lecturer in economic and business sciences Mlilo Mthokozisi said ordinary people would have to tighten their belts because there was nothing they could do to mitigate the situation. “In future the cost of borrowing would become more expensive than what it is now,” he said.
He lamented the fact that South Africa was too dependent on foreign funding for its development. “The ideal situation for a country is to have its own pool of funds, but unfortunately in South Africa we are mostly funded by foreign investment,” he said.
He said the culture of non-payment by locals could contribute to the imminent junk status.
A typical example was the rebellion by some motorists who were unwilling to pay e-tolls, he said. As a result of motorists’ attitude the South African National Roads Agency Limited (Sanral) was struggling to pay money it borrowed from abroad to implement e-tolls, he said.
“The e-tolls system seems not to be viable because of motorists who are not willing to pay Sanral,” he said.
Constitutional law expert Professor Shadrack Gutto of Unisa said the possible downgrading would not come as a surprise to the country.
“There had been several of them over the past two years,” he said. Gutto expressed unhappiness about the way law enforcement agencies handled violent protests, which contributed to political risk in the country. “I don’t think we have handled protests very well in line with the law and the Constitution.”
There were enough laws to deal with protests but the problem rested in the interpretation and application of such laws, he said.
Political analyst and research fellow at the Helen Suzman Foundation Aubrey Matshiqi believes South Africa ought to be critical about positions taken by the rating agencies.
He said the rating agencies in global politics were not particularly objective because they represented a powerful bloc. South Africa must guard against selling its sovereignty to a rating agency, he warned.
He said the credibility of rating agencies was at stake after they had failed to give evidence as to why countries rated highly with AAA status had been the cause of the global economic downturn of 2008. According to him, the latest move by Moody’s was an exercise to redeem its credibility after it failed to warn the world beforehand about the financial crisis in 2008.
Matshiqi said: “But, it is understandable why we can’t be critical about their stance; it is because our country is in financial trouble.”
He said there was a political risk that might attract Moody’s to downgrade the country. He gave the example of the December 9 incident when President Jacob Zuma fired Nhlanhla Nene as finance minister and appointed Des Van Rooyen in his place. Zuma removed Van Rooyen from that position just a few days later following a massive public outcry and the plunging of the rand to record lows against major currencies.
He was forced to appoint Pravin Gordhan as finance minister, moving Van Rooyen to the portfolio of Minister of Co-operative Governance and Traditional Affairs. But the harm had already been done as ratings agencies downgraded the country which is now close to junk status.
Matshiqi also spoke about the perceived fight between Gordhan and Tom Moyane, South African Revenue Services commissioner, saying it raised concerns about political uncertainties in the country. “The next concern would be about the policy uncertainty from those who would ask whether Gordhan would survive in his current position and who is likely to succeed him, and whether his successor would implement the same policies,” he said.
“Once investors start to cast doubt on our policies they will also doubt this country as an investment destination.”
Gordhan was recently in London and New York trying to persuade investors not to pull out of the country, which is fighting hard to prevent any further downgrading. He says he is hopeful South Africa can avoid a credit rating downgrade when Moody’s visits the country this week.
The review of the situation in the country by Moody’s will indicate whether South Africa would remain in its current rating status or be downgraded.
rapula.moatshe@inl.co.za
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