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

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 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 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. The associated liabilities 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 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 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 rates, stronger exchange controls could be applied. By all accounts, the requirement that institutional investors 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) 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.

* Patrick Bond is professor of political economy at the University of the Witwatersrand.

* THE VIEWS OF THE ABOVE ARTICLE ARE THOSE OF THE AUTHOR AND DO NOT NECESSARILY REFLECT THE VIEWS OF THE PAMBAZUKA NEWS EDITORIAL TEAM

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