Thu, Mar 31, 2016
What Moody’s has explicitly demanded of Finance Minister Pravin Gordhan is a cut to the civil service budget – which after last year’s 3-year settlement way above the inflation rate he cannot adjust.
Moody’s rating agency is spending this week in South Africa, potentially delivering yet another blow to the country’s economic ego. The dreaded ‘junk’ label is still months away, but senior vice president Kristin Lindow is likely to drop the rating to the lowest-possible investment grade.
The agency is considered utterly chaotic – having labeled Lehmann Brothers bank an excellent investment just a week before it went bankrupt in 2008 and facing a myriad of lawsuits by angry clients rated poorly since – but its voice is vital to world financiers.
What Moody’s has explicitly demanded of Finance Minister Pravin Gordhan is a cut to the civil service budget – which after last year’s 3-year settlement way above the inflation rate he cannot adjust. So Gordhan’s February 2016 budget chopped spending in other areas: the military, poor people’s grants, municipal services and housing.
He also failed to give universities sufficient funds to please #FeesMustFall protesters and outsourced workers – who last week at UKZN settled what may cost the university an extra R50+ million annually so that the workers have a minimum R6000 month wage during the 2016-18 period.
Moody’s attention to the sharpness of Gordhan’s knife blade is misplaced, because the domestic debt is not so serious – a 3.2% deficit/GDP rate in 2016-17 will shrink to 2.8% by 2018, far lower than predecessor Nhlanhla Nene managed in his mid-term budget last October – especially when we consider that in 2009, as Gordhan took the deficit well above 7% of GDP, Moody’s actually raised South Africa’s credit rating!
But it is South Africa’s foreign debt that bears attention. Last week the SA Reserve Bank’s Quarterly Bulletin recorded overseas liabilities of government plus the private sector at $135 billion. This is extremely high (Nelson Mandela inherited foreign debt of $25 billion), yet thanks to South Africa’s rand-denominated foreign debt falling $9 billion because the currency has crashed 25% against the dollar over the last year, it is not nearly as bad as the $144 billion liabilities at last count in 2015.
But sadly, this still leaves SA at a foreign debt/GDP ratio of 41%, exceptionally high in historical terms. It is about the level reached when PW Botha defaulted in 1985 after his ‘Rubicon Speech’ at Durban City Hall. At that point thanks to financial sanctions, Botha defaulted on $13 billion in short-term debt he could not repay.
If the same pressure intensifies, South Africa will need to borrow $3 billion from the Brazil-Russia-India-China-South Africa (BRICS) Contingent Reserve Arrangement, and then go to the International Monetary Fund for a structural adjustment loan.
Gordhan is preparing the country for this by squeezing hard on the budget, which will lower growth further because the private sector has also halted growth of its investments. Financial speculation is where big business puts its money, along with sneaking it out of the country.
Last December, the NGO Global Financial Integrity identified South Africa as the 7th worst victimised country from tax-dodging, with an average of $21 billion in annual ‘illicit financial flows’ by big corporates over the past decade. In addition the licit (legal) outflow of profits, dividends and interest continues at a devastating rate.
Gordhan’s at war with his tax authority and even when he was SA Revenue Service commissioner from 2000-09 and then finance minister, he couldn’t stop the corporates. The main reason is that the leading tool to halt capital flight – exchange controls – were gradually removed by neoliberal state officials starting in 1995.
In turn, that means that for the first time since records began more than 60 years ago, South African assets abroad officially outweigh foreign assets in South Africa, according to last week’s SA Reserve Bank Bulletin.
The political scenario is also something Moody’s watches closely, according to Lindow. Mixed signals continued over the weekend, with Gordhan refusing to answer 27 questions from his SARS underlings related to the ‘rogue unit’ that Gordhan had allegedly established to investigate complex cases with sophisticated surveillance powers.
As SARS and the Hawks publicly attacked Gordhan, ANC secretary-general Gwede Mantashe came to his rescue by criticising “a well-calculated destabilisation plan with all the elements of disinformation, falsehoods and exaggerated facts.” In contrast, Jacob Zuma dismissed such concerns as “rumours and gossip, which insinuate some conspiracy against Minister Gordhan.”
Both Zuma and Gordhan operated in the murky field of Durban espionage during the 1980s. When last week in The Mercury, Imraan Buccus wrote that “Gordhan is our modern-day Che” (Guevara, the Cuban revolutionary), he recalled how “Generations of activists were schooled in OCMS - Organise, Conscientise, Mobilise and Support. Working above ground in community organisations like the Natal Indian Congress, the Durban Housing Action Committee and the Phoenix Working Committee, Gordhan drew on struggles around the world to recruit activists for the underground African National Congress since the early 1970s.”
At their peak, what Che and the Gordhan – whom I met in 1984 in those same sessions – could do better than anyone else in their generation, was assess the political balance of forces. In Che’s case, after the 1959 takeover of Cuba, he practiced his art in what was then Zaire and then again in Bolivia but in 1967 the CIA hunted him down there and shot him dead.
Gordhan’s time may also be up, but not at the hands of his SARS commissioner Tom Moyane, the Hawks and the awkward 27 questions. Instead, it may be Moody’s Kristin Lindow and her be suited colleagues at Standard&Poors and Fitch who end the romantic tale by junking Gordhan – no matter how tight he squeezes his lowest-income constituencies by reducing the real value of their welfare grants as food inflation roars into double digits.
What we might only hope is that since international financiers are preparing for a massive run on South Africa – the logic of the junk bond rating is to sell SA securities – the muti Gordhan needs is simple, the same stuff that saved Botha in September 1985: exchange controls to keep the hot money in the country.
Lindow and the rest will be appalled if Treasury and Reserve Bank officials finally investigate this option – but at some point, like Che facing down his tormenters in the Bolivian mountains, what else can you do?
Header Image Credit: https://savemoney.co.za
Professor of Political Economy, University of the Witwatersrand