Monday, July 04, 2016

South Africa on Track to Avert Junk Status
David Pilling and Joseph Cotterill in London
Financial Times

South Africa will defy market expectations a second time by avoiding a ratings downgrade to junk this year, according to Pravin Gordhan, the embattled finance minister, who is racing to turn the flagging economy around against a backdrop of political turmoil.

Africa’s most industrialised economy has been losing the confidence of many investors anxious at the direction of the African National Congress government under President Jacob Zuma as the country slides from prolonged stagnation towards recession.

The economy shrank 1.2 per cent in the first three months of the year as output dropped in the struggling mining sector, drought hit farming and unemployment stayed chronically high.

South Africa has also been blighted by political unrest ahead of local elections in August that could see significant losses for the scandal-hit ANC.

Last week, violent protests in Pretoria over the ANC’s selection of its candidate for mayor left at least two people dead and parts of the administrative capital in flames.

Still, a defiant Mr Gordhan told the Financial Times that the government would deliver on promises made to the rating agencies to stabilise the economy and make structural reforms, including in the highly regulated labour market, to improve the country’s growth potential.

“This will be another test that we will pass,” Mr Gordhan said of the ratings decision, expected in December. “You’ve got to remain hopeful. There’s a general recognition in the country that we’ve won six months, and during that six months, both for our own sake and for the sake of our ratings, we need to get on with the job.”

Standard & Poor’s decided last month to keep its rating for South Africa’s foreign debt one notch above junk, although with a negative outlook.

A downgrade would make it more expensive for South Africa to borrow and would further undermine investor confidence in the ability of Mr Zuma’s government to stop the rot.

The rand, already weak after the president suddenly sacked a respected finance minister last December and replaced him with an unknown backbencher, sank again in the market turmoil triggered by last week’s decision by Britain to leave the EU.

Mr Gordhan, who previously served as finance minister from 2009-2014, was appointed after the December debacle to steady the ship.

Razia Khan, chief economist for Africa at Standard Chartered Bank, said South Africa had become a “proxy for emerging market weakness.”

Mr Gordhan, who said South Africa’s political dysfunction was nothing compared to Britain’s, said the government was close to announcing a series of reforms to the labour market.

These would be “on the minimum wage, on balloting before strikes, on compulsory arbitration, so that strikes don’t last for ever,” he said.

Many economists argue that strong and politically influential unions, which have traditionally enjoyed the unconditional support of the ANC, have put off investors by complicating labour relations and by keeping wages artificially high in a country with 26.7 per cent unemployment.

Mr Gordhan said it was essential for the economy to get more people into work in order to boost demand.

South Africa’s economic woes

The finance minister, who has been the subject of personal and political attacks, denied that the country was undergoing an institutional crisis.

The Treasury has been in a bitter struggle with Mr Zuma and his allies over what have been seen as attempts by the president to undermine the independence of one of the country’s strongest institutions.

Mr Gordhan, a veteran of the anti-apartheid struggle, made a passionate defence of his party. He denied the ANC had lost its legitimacy, saying talk of losses in coming elections were a normal part of the political process.

“The ANC today remains a force for stability, it remains a force for progress, and it remains a force for cohesion, notwithstanding some of the aberrations that we’re seeing at the moment,” he said.
South Africa was “a state in formation.”

“We have a responsibility to the country, and to this and future generations to ensure that important institutions like the Treasury remain on a sustainable path and serve their purpose,” he said. “This is still Mandela’s miracle at work.”

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