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Business warns of ‘negative spiral’ after reshuffle-induced downgrade

Jabu Mabuza

Jabu Mabuza

Photo by Duane Daws

4th April 2017

By: Terence Creamer

Creamer Media Editor

     

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Business has warned of a possible “negative spiral” for the country’s economy as a result of President Jacob Zuma’s “ill-considered” March 31 Cabinet reshuffle, which led S&P Global Ratings to downgrade South Africa’s sovereign credit rating to the subinvestment-grade status of BB+, with a negative outlook.

Business Leadership South Africa (BLSA), which represents big business in the country, said Zuma had done South Africa great harm, and “should be held to account by all South Africans”.

Business Unity South Africa (Busa), meanwhile, argued that the political instability triggered by the extensive Cabinet reshuffle, was having a “domino effect” and could be the start of a negative spiral, whereby borrowing costs rise and the country finds it increasingly difficult to both service its debt and fund its social-development programmes and services.

Similarly, the Steel and Engineering Industries Federation of Southern Africa (Seifsa) expressed “grave concern” about the stewardship of South Africa’s political economy and said it held Zuma directly responsible for the country’s credit rating downgrade to junk status. Likewise, the Chamber of Mines attributed the downgrade directly to the “illogical and damaging Cabinet reshuffle”.

While the risk of a downgrade has been a real and present danger for more than a year, the reshuffle resulted in an earlier ratings assessment by S&P Global Ratings, which was originally scheduled to make a determination only in June. Moody’s has, likewise, placed South Africa's rating on review for a downgrade; a move also prompted by the changes made by Zuma to his executive, particularly the removal of respected Finance Minister Pravin Gordhan. Zuma has appointed former Home Affairs Minister Malusi Gigaba as his new Finance Minister.

The downgrade is expected to result in higher interest rates, inflation and food prices, as well as lower economic growth, with some commentators noting that downgrades have typically been associated with recessions in other countries. It would also have a negative effect on investment and employment and raise the cost of borrowing for government and State-owned companies.

Busa called on government to urgently assess whether its current path was serving the broader interests of the country, with its president, Jabu Mabuza, expressing deep disappointment with developments, particularly in light of the strenuous efforts made by government, labour and business to prevent a downgrade. “Government has to heed these warnings and decisively act in the best interests of the country and its citizens” Mabuza said in a statement.

BLSA made a similar point: “Prior to the President’s ill-considered decisions on the restructuring of the Cabinet, South Africans working together had made sufficient progress on economic growth, structural reforms and fiscal consolidation to maintain our investment grade rating and engender confidence that was reflected in the gradual strengthening of the rand.”

Busa CEO Tanya Cohen warned that the downgrade would mean that fewer public and private funds were available to stimulate investment and infrastructure development – leading, in turn, to lower growth and higher levels of unemployment. “This is directly contrary to what the country needs to sustain inclusive growth and employment as a means to transform our economy and address social developmental needs of the country.
 
Busa planned to "redouble" its efforts in the coming days to engage with all affected stakeholders and underline the importance of a government that demonstrates ethical leadership, good governance and accountability. “The political and institutional instability concerns highlighted by S&P indicate that we have to urgently accelerate our efforts to create an environment conducive to stability and investment, and which will yield much needed growth and employment” says Cohen.

The organisation would seek urgent meetings with officials in the Tripartite Alliance and had already initiated meetings with social partners in organised labour and civil society in order to "map the way forward so as to re-set the economy on a more positive trajectory".

Seifsa CEO Kaizer Nyatsumba said his organisation would be working closely with other organised business, organised labour and similarly concerned stakeholder groups to raise its concerns directly with the country’s political leadership. “The high office that Mr Zuma holds constitutionally enjoins him to put South Africa’s interests first in everything that he does. He is supposed to be an asset to the country and a unifier. Regrettably, however, increasingly our President is proving to be a major economic liability,” Nyatsumba said.

The Chamber of Mines said the firing of a competent, dedicated and globally respected Finance Minister, had negatively impacted the key institution of the National Treasury and, ultimately, the creditworthiness of the South African government. “The result is significantly detrimental for the entire country,” the chamber said, adding that the African National Congress and the people of South Africa “should hold President Zuma to account”.

Edited by Creamer Media Reporter

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