South Africa’s Junk Credit Rating was Avoided, But at the Cost of Junk Analysis

15 December 2016 by Patrick Bond

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Standard&Poors (S&P) gave South Africa a fearful few hours of anticipation last Friday, just after dust from the political windstorm of the prior week settled. The agency downgraded the government’s securities that are denominated in the local currency (the rand) although refrained from the feared junk status on international securities. It was a moment for the ruling business and political party elites’ introspection, but in heaving a sigh of relief they are not looing far enough.

At a time of near-recessionary conditions and rising unemployment, local and international observers are probably mistaken to consider President Jacob Zuma a nearly spent force. The ruling African National Congress (ANC) turned to well-tested procrastination and cover-up strategies to yet again protect Zuma last Monday. The prior weekend’s meeting of the ANC National Executive Committee (NEC) had considered the notion that he should step down, presumably to be replaced by his deputy, the billionaire (and former trade unionist) Cyril Ramaphosa, well ahead of the scheduled December 2017 ANC leadership vote. (The other major contender for ANC president is Zuma’s ex-wife, outgoing African Union chairperson Nkosozana Dlamini-Zuma, with ANC Treasurer Zweli Mkhize a potential compromise candidate.)

A reported third of the NEC delegates were supportive of his recall, but Zuma once again remained in control. The party’s ability to ‘self-correct’ appears to have expired, with a great many leaders ‘captured’ by a carefully-constructed patronage system centred on three immigrant-Indian brothers, the Guptas. Deputy Finance Minister Mcebesi Jonas provided evidence of that system last March, in the form of the Guptas’ oral offer to him to become Finance Minister (along with a $43 million inducement) if he served their interests in major procurement contracts.

ANC Secretary General Gwede Mantashe then announced, “We will deal with the broader picture. We are refusing to be narrow in dealing with this matter because the threat is bigger than this one incident.” In May, however, he ended the Gupta ‘state capture’ investigation, saying it was ‘fruitless’ supposedly because of inadequate evidence. Last month, however, the outgoing independent Public Protector, Thuli Madonsela, released a blockbuster report summarising the evidence of Gupta malfeasance, which compelled the electricity parastatal leader to step down in humiliation.

Last week was even more eventful, what with the internal ANC attempt to oust Zuma. No doubt, opposition parties from the centre-right (Democratic Alliance) and far left (Economic Freedom Fighters) quietly welcomed the continuation of Zuma’s reign because a far worse outcome would have been his replacement by Ramaphosa. In spite of his role in the Marikana massacre, he will be a harder opponent to ridicule in the months ahead.


Again rated just shy of junk

But major investors were obviously hoping Zuma would fall, and that Ramaphosa’s ascension would end the career threat against their favourite ANC politician, Finance Minister Pravin Gordhan. Given how much power the credit ratings agencies wield, Gordhan appears to have been spared an anticipated cabinet reshuffle in which Zuma goes for broke. The agencies retain this power because while Fitch, Moody’s and S&P offered pessimistic commentary on Zuma’s reign in their most recent statements, they did not downgrade South Africa to junk status. The whip remains poised above South Africa’s head, awaiting next June’s ratings.

The reprieve left the whole economically-aware population of South Africa cautiously celebrating. However, last Friday’s statement by S&P – typically a stricter judge than Fitch and Moody’s – lacked logic and conviction, aside from predictable neo-liberal nostrum to cut the budget deficit and reduce labour’s limited influence even further. On the other hand, S&P’s incompetence may allow South Africans to better dispute the all-encompassing power of ratings agencies.

For these are dangerous institutions whose mistakes – e.g. as the 2008 world financial meltdown gathered pace, giving AAA investment grade ratings to Lehman Brothers and AIG just before they crashed, as well as to Enron four days before it fell in 2001 – can be catastrophic to investors and the broader economy.

No wonder the Brazil-Russia-India-China-South Africa (BRICS) Goa leadership summit in October agreed to explore “setting up an independent BRICS Rating Agency Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness.  This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security.  Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due.  Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc.  A rating of BB or below is considered a ‘junk bond’ because it is likely to default.  Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness.  The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s : https://www.fitchratings.com/
based on market-oriented principles, in order to further strengthen the global governance architecture.” However, given how poorly “market-oriented principles” hold up in the chaotic world financial system, and given the dominance of neoliberal economic bureaucrats within the BRICS, this strategy appears as self-defeating as the BRICS’ alleged ‘governance’ reform of the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
last December. Then, aside from South Africa (which lost 21 percent of its vote), four BRICS increased IMF voting shares at the expense of Nigeria and Venezuela (each of which lost -41%), and many more poor countries from Africa and Latin America.

This week the main question to ponder is why, given utterly zany politics and the stagnant economy, was South Africa not downgraded all the way to junk? S&P lowered the risk rating of local state securities, but not the sovereign (foreign) debt grade. The main reasons S&P gave are telling:

  • “the ratings on South Africa reflect our view of the country’s large and active local currency fixed-income market, as well as the authorities’ commitment to gradual fiscal consolidation. We also note that South Africa’s institutions, such as the judiciary, remain strong while the South Africa Reserve Bank (SARB) maintains an independent monetary policy.”

Translation:

  • + “the country’s large and active local currency fixed-income market” = pension and insurance funds keep buying government bonds because residual exchange controls force 75% of such funds to stay inside SA and create a large artificial demand for state securities;
  • + “South Africa’s institutions, such as the judiciary, remain strong” = not only do the courts regularly smack down Zuma’s excesses, but more importantly they also religiously uphold property rights, which in South Africa are ranked 24th most secure out of 140 countries surveyed by the Davos-based World Economic Forum; and

Another reason S&P is optimistic is supposedly that “The trade deficit is declining on the lower price of oil (which constitutes about one-fifth of South Africa’s imports),” but in reality, the trade deficit just exploded. South Africa had a $1.4 billion trade surplus in May, but this became to a $330 million deficit in October. Meanwhile over the past month, the oil price soared 21%, from $43 to $52 per barrel, and last Friday, OPEC OPEC
Organization of Petroleum-Exporting Countries
OPEP is a group of 11 DC which produce petroleum: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela. These 11 countries represent 41% of oil-production in the world and own more than 75% of known reserves. Founded in September 1960and based in Vienna (Austria), OPEC is in charge of co-ordinating and unifying the petroleum-related policies of its members, with the aim of guaranteeing them all stable revenues. To this end, production is organized on a quota system. Each country, represented by its Minister of Energy and Petroleum, takes a turn in running the organization. Since 1st July 2002, the Venezuelan Alvaro Silva-Calderon is the Secretary General of OPEC.

OPEC : http://www.opec.org/opec_web/en/
’s latest collusion to cut output aims to push it past $60 in coming weeks. (And the stronger rand witnessed over the course of 2016 did not offset that rise: over the last month, the rand fell from 13.2/$ to 13.8/$; its last peak was R6.3/$ five years ago.)


Revealing silences

Not only are S&P’s rudimentary observations off target, the silences in its statement are also disturbing. If we consider crunch problems that might lead to a drastic financial crisis here, S&P was surprisingly blasé about the country’s foreign debt. The last SARB Quarterly Bulletin records that debt at the highest ever (as a ratio of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
) in modern SA history: 43% (higher than PW Botha’s default level of 40% in 1985).

Neither does S&P mention illicit financial flows (which have been estimated by Global Financial Integrity at $20 bn/year); or the balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. deficit due to profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. and dividend outflows (usually more than $10 bn/year) following excessive exchange control liberalisation; or South Africa’s exceptionally high international interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates on 10-year state bonds, at 9% (3rd amongst 60 major economies, only lower than rates in Brazil and Turkey which both pay 11%). Corporate overcharging on state outsourcing – which the Treasury’s Kenneth Brown says costs taxpayers $17 billion per year – does not warrant a mention.

To S&P’s credit, however, the agency gave critics of big business at least minor affirmation by observing “the corporate sector’s current preference to delay private investment, despite high margins and large cash positions.” In an opposite signal, though, S&P also gave the country’s leading disinvestor, Anglo American, an improved rating on Friday (all the ratings agencies had reduced Anglo to junk status in February). S&P isn’t about to downgrade the disinvesting firms, and state-directed reinvestment – e.g. as in 1960s South Korea – is not on the cards. So in media coverage this foundational critique of our big corporates’ ‘capital strike’ was only barely mentioned by a sole local periodical (Business Report).

It still strikes me that like the Gupta and (Stellenbosch-based Afrikaner tycoon) Rupert families, the three ratings agencies will continue attracting the accusation of “state capture!” insofar as the public policy this neoliberal foreign family dictates is also characterised by short-term self-interest, occasional serious oversights and national economic self-destruction. The only reasonable solution is progressive delinking from the circuits of world finance through which these agencies accumulate their unjustified power.


Author

Patrick Bond

Patrick Bond is professor of political economy at the Wits University School of Governance in Johannesburg and co-editor of BRICS: An anti-capitalist critique (published by Haymarket, Pluto, Jacana and Aakar).


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