Tue, Apr 4, 2017
Credit rating agency Standard and Poor's (S&P) has downgraded South Africa's rating to 'junk' status, as the country's currency continued to slide following a major cabinet reshuffle. Let's discuss the value and merits of being labeled 'junk'.
On April 3, 2017 credit rating agency Standard & Poor’s downgraded South Africa's credit grade to 'junk' status, much like it did to Russia in January of 2017 and similar to its downgrade of the EU's credit status in 2016, after the 'Brexit' vote.
The 'junk' credit rate implies that South Africa’s government, banks and businesses are as of now practically incapable of borrowing money on the international financial markets.
To be more precise, S&P Global Ratings lowered the long-term foreign currency sovereign credit rating on the Republic of South Africa to BB+, aka ‘junk’, and the long-term local currency rating to BBB, a few steps away from ‘junk’. They also lowered the short-term foreign currency rating to B (highly speculative) and the short-term local currency rating to A-3 (non-investment grade speculative).
It appears that the rating drop affects the government the most in its ability to finance its long term financial obligations.
South-Africa as well as Russia however have GDP debt ratio’s below 50%, which means they are very capable to fulfil their long term financial obligations. S&P's rating drop therefore mostly affects the (short-term) future.
How is it possible that countries like South Africa and Russia - rich in human capital and natural resources - are reduced to ‘junk’ where it concerns their financial credibility on the international markets?
Is this due to failed political leadership, corruption or social unrest? Or is it something else?
One might wonder if the decision of this US based rating agency is totally devoid of a political agenda and purely based on economics.
The US and Russia have been embroiled in political powerplay for decades. The economic sanctions over the Ukraine issue hurt Russia but not enough to topple its economy, probably partly due to the policy of self-sustainability Russia took in recent years.
Not even the recent bombing attack on Pres. Putin’s home turf St. Petersburg is likely to unnerve the Russians.
How does South-Africa fit to the pattern?
Mr. Zuma, South-Africa's president and ANC leader is a controversial figure much like Mr. Putin is.
Pres. Zumba is no longer available for re-election in 2019 and will step down as the leader of the ANC at the end of this year. Somebody else will have to take over the reigns.
What if South-Africa were to decide to follow Russia’s example and decide to focus on self-sustainability? Both countries have plenty of resources, both natural and in terms of manpower.
What about China?
Trade between Russia and China has grown rapidly as their leaders have committed to advancing bilateral economic cooperation. The two countries are reducing the use of US Dollar in bilateral trade in favour of their own currencies, which is very likely to be at the heart of the tensions between Russia, China on the one hand and the US and its allies on the other.
Africa at large is contracting its imports of goods from the world, most steeply in Angola, South Africa, Republic of Congo, Equatorial Guinea and Zambia, in favour of China. These countries are China’s main African trading partners, which together account for more than 70% of all Chinese imports from Africa. At least until 2015.
Chinese-African relationships go well beyond the domain of economics.
China strongly supported African independence movements and gave aid to newly independent African nations in the 1960s and 1970s. China has been active in health care development among others and medical assistance has been one of the main successful areas of cooperation.
Obviously, as any sovereign nation China will have its own self-interest at the top of its priority list, but somehow the nature of the relationship with Africa ‘feels’ different. It seems that nature of the relationship is established on the basis of mutuality, whereas Western powers have a longstanding tradition of colonial and imperial exploitation.
South-Africa should weigh its options.
If its financial and economical credibility in a dollar based economy is ‘junkified’ by the strike of a pen, well, then maybe it is time for a change of thought. A real change..
If I were a citizen of South Africa, I would take the downgrade as an insult, much more than to panic or to fear its consequences. As much as I - being a European citizen - take issue with the downgrade of the EU economies over the 'Brexit' vote.
What if we were to rate the rating agencies?
The economical impact of the 'Brexit' vote is yet 'non-investment grade speculative' at best, as much as a credit rating drop solely based on a cabinet re-shuffle must be deemed 'highly speculative'.
When rating agencies, created with the intent of providing stability based on sound economical parameters, adjust their ratings short of political speculation, it is time for a change, a real change...
For it is one thing to label an individual financial institution as 'junk', but when sovereign nations with real economies suffer from being labeled 'junk', their citizens will suffer the most. Then the merits of said rating system must be deemed 'highly questionable'.