Senior business leaders fear South Africa’s new junk status will damage the economy and are generally aghast at last week’s political upheavals that started with a major Cabinet shake-up.
However, yesterday they were confident they can weather the fallout – with several banks reassuring the public they’re well capitalised. However, rebuilding private sector-government relations, like the CEO Initiative did after Nenegate, may be more difficult.
Mike Brown, CEO of Nedbank, said on Tuesday the sovereign credit rating downgrade was “disappointing” as the country was “shooting itself in the foot”.
The downgrade was a surprise as the economy was improving and moderate growth was expected.
“A few months ago, the forecasts for GDP growth were 1.2% or 1.5%, but now forecasts are coming in below 1%,” he said.
S&P said on Monday Zuma’s surprising and wide-ranging Cabinet reshuffle undermined SA’s policy certainty, growth and growth outcomes and was the primary reason for the downgrade.
Business and political leaders, including Cosatu, the SACP, ANC stalwarts and the ANC’s internal integrity committee are demanding Zuma’s resignation.
This comes after Brown and other senior South African executives, government and labour worked as part of the CEO Initiative to avoid a downgrade and to boost investor confidence.
The CEO Initiative was formed after the president fired Nhlanhla Nene as finance minister in December 2015.
The initiative is a platform to work with key stakeholders to avoid a downgrade and to boost investor confidence.
Pravin Gordhan, axed as finance minister last week, played a critical role in the establishment of this initiative, which managed to convince the three major rating agencies for more than a year to retain SA’s investment grade status.
Brown said the downgrade was a setback to turnaround initiatives. “All of the financial markets were pricing in that we were able to avoid a downgrade. It means our work … is going to get harder than it needed to have been.”
On a consumer level, a downgrade will result in higher interest rates and inflation in the long term, eroding spending power.
“The downgrade will make South Africans poor. If people are not feeling confident, there will be less investment. Growth rates and employment levels will be lower than they should be,” said Brown.
A downgrade is also a setback for the government as it currently has R2 trillion in public debt, of which 10%, or R220 billion, is in foreign currency. A downgrade for government means that its borrowing costs to fund its investment initiatives will rise.
The president of Business Unity South Africa, Jabu Mabuza, called for urgent reassessment by the government.
Fitch, meanwhile, has the country’s sovereign rating one notch above “junk”, while Moody’s Investors Service has SA two levels above junk, with a negative outlook.
Brought to you by Moneyweb