Will rating downgrades intensify or reverse Treasury’s neoliberal ideology?

18 April by Patrick Bond

CC - Flickr - Linh Do

Supporters of austerity are happy because South Africa’s junk rating is a good stick with which to whip President Zuma. But his immediate concern is survival, not the economy. Could the current crisis generate a long-overdue era of redistribution, racial justice and radical economic transformation? This was the promise of new Finance Minister Malusi Gigaba last Saturday, April Fool’s Day.

As South Africa digests the news of Standard&Poor’s April 3 downgrade of state debt to junk status following Jacob Zuma’s March 30 cabinet reshuffle, two other credit rating agencies 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/
will soon hold forth.

Even if these agencies’ biases and competence should be questioned, further junk ratings could well cause a ‘run on the bank’ similar to 1985 when PW Botha’s crazed Rubicon Speech caused a $13 billion default. The foreign debt/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.
ratio hit 40% - today it is nearly 50% - and compelled Botha to impose exchange controls (the ‘finrand’).

In contrast, might the current crisis generate a long-overdue era of redistribution, racial justice and radical economic transformation? This was the promise of new Finance Minister Malusi Gigaba last Saturday, April Fool’s Day.

‘Zupta’ white elephant breeding

Similar false promises of transformative infrastructure left society disappointed during Gigaba’s 2010-14 role as Minister of State Enterprises. The mega-project mania included:
- Eskom’s corrupt (and now unnecessary) Medupi and Kusile coal-fired power plants, as well as its desired R1 trillion in nuclear plants apparently pre-contracted (vendor-liability-free) from Moscow’s Rosatom;
- Transnet’s climate-frying plans to facilitate an R800 billion rail line to export 18 billion tonnes of coal from Limpopo, Mpumalanga and KwaZulu-Natal, and a R250 billion Durban port-petrochemical expansion;
- PetroSA’s proposed R80 billion Mthombo refinery; and
- World Cup stadia now recognised (even by Danny Jordaan) as white elephants after initial assurance they would not be – though thankfully Pravin Gordhan’s last act as Finance Minister was to halt the ridiculous R6.4 billion Durban 2022 Commonwealth Games).

Sports mega-events aside, these are mainly foibles of State-Owned Enterprises, yet Trevor Manuel and Gordhan gave them R683 billion in state loan guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). . The associated liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). as well as the failed Sanral e-tolling and failing SAA ‘turnaround’ (and around) were the second reason – after political hijinks – for S&P’s junk label.

Moreover, Gigaba’s alleged close ties to the Gupta brothers are drawing attacks from the Economic Freedom Fighters and SA Communist Party. Additional worry is expressed by business publisher Peter Bruce that “with the Treasury in their pockets, watch the Guptas and the Zumas and their coterie of hangers-on go for the Reserve Bank… it was Gigaba who formally switched on the state capture project for them when, on 8 June 2011, he revealed to a cabinet meeting his plans to replace the chairmen and boards of Transnet, Eskom and Denel, among others, immediately. Many of the new board members were Gupta proxies and they quickly took control of the procurement operations of the boards they sat on.”

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 debilitating raiding of the currency. Sygnia’s Magda Wierzycka cites Citibank’s World Government Bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. Index as critical on Friday: “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.”

The SA Reserve Bank will be tempted to rapidly raise interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
to restore financial inflows. The record was in mid-1998 when the Bank hiked rates 7% within two weeks during a currency crash from R7/$ to R10/$.

The rand’s recent peak of R6.3/$ occurred in 2011 during Gordhan’s first term as finance minister, coinciding with the commodity super-cycle. At its trough 14 months ago, a raid by Goldman Sachs pushed it to R17.9/$, before strengthening to R12.3/$ more recently. Such volatility needs curing.

To deter financial predators and gain the space to lower 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, stronger exchange controls could be applied. By all accounts, the requirement that institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. retain 75% of assets in domestic markets saved South Africa during the 2008 financial meltdown.

Foreign financiers are a fickle group. To illustrate, on Monday, French bank Societe Generale actually 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, not only are financial markets buoyed by speculative ‘hot money.’ Since 2014, both the private and state sectors have lowered fixed investment dramatically. So in response to S&P, Treasury was only partially correct to stress the need for “reducing reliance on foreign savings to fund investment.”

More state spending could stimulate, if well directed

True, with very high foreign debt ($145 billion), it is critical to reduce vulnerability to foreign finance, as the 1920-40s economist John Maynard Keynes warned. Moreover, when private capitalists delay new investment due to high interest rates and overcapacity, Keynes suggested lowering rates and increasing state spending.

However, if Zuma’s new team abandons fiscal austerity, the additional money would likely not be spent wisely. In any case, Gigaba has committed to continuing the austerity drive, to lower the 2019 budget deficit to 2.6% of GDP: “I will work within the fiscal framework as agreed by government and parliament. There will not be any reckless decisions.”

That means Treasury will tighten a budget already suffering real (after-inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. ) cuts in social spending, including national-provincial health shrinkage of 13% in 2016 – when Life Esidimeni patients became victims of cost-cutting – and lower social grants going to the poorest.

Most neoliberals who support austerity are this week expressing schadenfreude (happiness at someone else’s misfortune) because the junk rating is a good stick with which to whip Zuma. However, his immediate concern is survival – a parliamentary impeachment vote in early May – not the economy. So further such attacks won’t have the impact they did in December 2015, when Zuma gave (Gupta-linked) Desmond van Rooyen the finance ministry, a decision reversed by bankers from ABSA, Goldman Sachs, Investec and Standard (including Chinese co-owners).

Such influence has obviously waned as Zuma now goes for broke, leaving the main task ahead a renewal of ideological debate over how, sensibly and without corruption, to protect the currency and kick-start the economy.

Source: Pambazuka


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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