World Economy

South Africa Instability Will Hasten Downgrade to Junk

The drought had a devastating effect on the economy.The drought had a devastating effect on the economy.

The political instability in the country would make it easy for ratings agencies S&P Global and Fitch to downgrade South Africa to junk status when they announce their decision in December, Momentum economist and researcher Johann van Tonder said in an interview with Business Report.

A downgrade to junk status will make it more expensive for the country to borrow funds, IOL reported.

Van Tonder said the trouble that Finance Minister Pravin Gordhan was having with the National Prosecuting Authority would hurt the country economically if it was not resolved before the agencies’ decision at the end of the year.

Markets are tracking the fraud case against Gordhan and ratings agencies have previously warned that South Africa’s politics may interfere with economic policy.

Gordhan is presenting the medium-term budget policy statement next week.

 Political Squabbling Risky

“The spat involving Gordhan and the NPA can do a lot of harm for the country in the eyes of potential investors and the rating agencies.

“If the finance minister is removed from office then chances are that the country will get a downgrade.

“This is a clear example of how political instability can cause serious harm to the economy. Political leaders must think hard before making decisions. We don’t need political squabbling to create uncertainty because markets want a stable environment to operate,” he said.

However, Van Tonder said, politics aside, South Africa did not deserve to be downgraded.

“We don’t deserve a downgrade on the basis of the non-performance of our economy. We had a severe drought over the last two years, which was beyond our control.

“The drought had a devastating effect on our economy and if you add the power cuts of 2015, there is no way any country in the world wouldn’t have been affected by those two occurrences,” he said.

With a stable electricity supply this year, Van Tonder said he expected the economy to do better than the 0.2% economic growth for 2016.

“Enough power supply will alleviate a lot of pressure in the system. The drought is showing signs of coming to an end and with those two occurrences behind us we can expect the economy to grow by between 1% and 2% in the next three years,” he said.

In June, South Africa avoided a downgrade from S&P Global and Fitch rating agencies. But the agencies maintained their negative outlook on the country. S&P held the country’s sovereign debt rating at BBB- but warned about the consequences of low economic growth.


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