South Africa is digesting the news of Standard & Poor’s April 3 downgrade of state debt to junk status following President Jacob Zuma’s March 30 cabinet reshuffle – 20 ministers and deputy ministers were fired or shifted including Finance Minister Pravin Gordhan – which dropped the value of the local currency, the rand, from R12.4/$ to R14/$ over the past week.
On Friday April 8, mass protests led by the outraged middle class and some progressive civil society allies aim to register dissent in all the major cities. The ruling African National Congress’ former military wing is mobilising hundreds of its veterans and supporters to ‘defend’ Zuma.
As political conflict grows more heated than at any point since 1994, an already stagnant economy is now teetering. Even if the credit rating agencies’ biases and competence should be questioned, further junk ratings by Moody’s and Fitch could well cause a ‘run on the bank’ similar to 1985 when apartheid leader PW Botha’s crazed ‘Rubicon Speech’ catalysed a new round of financial sanctions by Western banks. Botha was compelled to default on a $13 billion debt and impose exchange controls, as the foreign debt/GDP ratio hit 40%. Today it is nearly 50%, but in contrast, might the current crisis generate a long-overdue era of redistribution, racial justice and radical economic transformation?
This is the renewed rhetoric of many ruling party ideologues, and was also the promise of Gordhan’s replacement as 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 (in between he was a controversial Home Affairs minister). The mega-project mania he endorsed 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 a $57 billion rail line to export 18 billion tonnes of coal from Limpopo, Mpumalanga and KwaZulu-Natal, and an $18 billion Durban port-petrochemical expansion;
· PetroSA’s proposed $5.7 billion Mthombo heavy oil refinery; and
· 2010 World Cup stadia now recognised (even by local organiser Danny Jordaan) as white elephants after initial assurance they would not be – though thankfully Gordhan’s last act as Finance Minister was to halt the ridiculous $450 million Durban 2022 Commonwealth Games).
Sports mega-events aside, these are mainly foibles of State-Owned Enterprises, yet Gordhan gave them $49 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 – three Indian immigrants who are widely credited with manipulation of Zuma – are drawing attacks from leftist leaders of 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 June 8 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: “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 $10 billion will flow out of the country.”
The SA Reserve Bank will then be tempted to rapidly raise interest rates to restore financial inflows. The record was in mid-1998 when the Bank hiked rates 7% within two weeks during a currency crash from R7/$ 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 the currency 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, judging by his record of corrupt patronage, 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 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 on April 18 in which he hopes that 50 ruling-party parliamentarians won’t desert him – 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.