The Republic of South Africa’s economy is in free-fall after the sacking of Finance Minister Pravin Gordhan on Thursday 30th March 2017, which has given way to Malusi Gigaba. So the Republic and Cabinet has gone away from a man with financial experience to an inexperienced minister. After the decision of the sacking the rand has fallen in value and the response on the stock exchange as also been reported less sale.
Today the international response to the sacking happen, but the junk-status has to be explained and I will do so by the words of InvestigationAnswers: “If a bond is downgraded to a level below investment grade (aka, “junk”), there is often a serious sell off of those bonds, because most institutional investors are forbidden from owning junk bonds” (http://www.investinganswers.com/financial-dictionary/investing/downgrade-96).
So the bond-status will lead to currency funds trading away the South African Rand and the Republic’s bonds that are traded internationally on the Financial Markets, as the Republic’s traded bonds to fill the budget will be downgraded, means the amounts of investment and interest will drop. That is a circle of trouble for the economy. The lack of international trade of the needed currency exchange will give less circulation and also stagnate the economy.
Here is the terrible news:
“S&P on Monday placed South Africa’s credit rating to speculative grade (commonly referred to as “junk”), a one-notch reduction to BB, and the ratings agency said “the economic crises President Jacob Zuma plunged the country into with his midnight cabinet reshuffle” prompted it to hold an emergency review at the weekend instead of June 2, as was scheduled, according to Business Day” (Mail & Guardian, 2017).
So the Standard and Poor’s rating will really make changes and reactions to the change of the steady hands of Pravin Gordhan, instead of the rookie and cookie Gigaba, a loyalist to Zuma and his presidency. Certainly Gigaba as a Finance Minister will not stop a nuclear trade involving the Gupta Empire, that would Gordhan if he didn’t believe it was for the good of the economy. Therefore, the financial instruments of S&P says something of the current state.
Parts of the Official Statement from S&P:
“The downgrade reflects our view that the divisions in the ANC-led government that have led to changes in the executive leadership, including the finance minister, have put policy continuity at risk. This has increased the likelihood that economic growth and fiscal outcomes could suffer. The rating action also reflects our view that contingent liabilities to the state, particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner. In our view, higher risks of budgetary slippage will also put upward pressure on South Africa’s cost of capital, further dampening already-modest growth” (…) “The negative outlook reflects our view that political risks will remain elevated this year, and that policy shifts are likely which could undermine fiscal and growth outcomes more than we currently project. If fiscal and macroeconomic performance deteriorates substantially from our baseline forecasts, we could consider lowering the ratings. We could revise the outlook to stable if we see political risks reduce and economic growth and/or fiscal outcomes strengthen compared to our baseline projections” (Fin24, 2017).
So the Capture of State report has together with the all the Financial market, Economic analysis and the forecasts has been overshadowed by the reaction to the decisions of President Zuma and the ANC. That the government changed the cabinet and the deficits of the budget. When the volatile economy needs strong leadership, instead the Finance Minister is a newbie who the international business world doesn’t seem to trust. That is a key thing to the matter, the businesses and financial market needs trust to the leaders, that is not in the ANC and Zuma crony.
The trust in the Financial Market is dwindling, they are not seeing signs of trust to President Zuma and his cabinet. The ANC does not have the stability or credibility to be trusted by one of the world most famous ratings systems of the financial market. When it is like this, that should be motivation to change, as the South African values and currency loses value. The price of the reckless acts of power shows what the price for the change of ministers can do. President Zuma has work to do! Zuma needs to change, though I doubt he care, he eats no matter what happens and seems like he thinks he can get get away with everything, even getting his economic policies called JUNK! Peace.
Fin24 – ‘FULL STATEMENT: S&P cuts SA to junk status, fears political risks’ (03.04.2017) link:http://www.fin24.com/Economy/full-statement-sp-cuts-sa-to-junk-status-fears-political-risks-20170403
Mail & Guardian – ‘S&P downgrades South Africa’s credit rating to junk status’ (03.04.2017) link: https://mg.co.za/article/2017-04-03-sp-downgrades-south-africas-credit-rating-to-junk-status
Mullen, Jethro & Petroff, Alanna – ‘South Africa’s currency plummets after finance minister fired’ (01.04.2017) link: http://money.cnn.com/2017/03/30/investing/south-africa-finance-minister-pravin-gordhan-ousted/