Thank heavens for SA’s legal institutional capacity

While the alleged extent of state capture is alarming, and would weigh against South Africa’s credit rating, the fact that the country’s legal institutional capacity is able to reveal the capture is a clear positive, a leading economist says.

“That together with other recent political developments should help avoid a downgrade,” Kevin Lings, chief economist at STANLIB, says.

While this would be positive for the rand, a lot will depend on what happens next, in particular whether the State Capture Report moves the process forward.

Lings says there is a 55% probability that ratings agencies could give South Africa another six months to see whether steps taken to get the economy going gain traction.

But challenges remain.

South Africa has not effectively dealt with the lack of economic growth, fiscal slippage and SOEs, he says.

Former Public Protector Thuli Madonsela’s explosive State Capture Report was released on Wednesday. The report recommended that President Jacob Zuma should appoint a commission of inquiry into alleged state capture within 30 days. It also found that Zuma and other cabinet members might have improperly interfered in the relationship between banks and the Gupta companies.

The findings come just weeks before S&P Global Ratings and Moody’s will announce their decisions on South Africa’s sovereign credit rating. While several commentators have warned that S&P is likely to downgrade the rating to junk in December, ratings agencies may resolve to give South Africa six more months to show that remedial action to boost the economy is bearing fruit. The lack of economic growth remains a primary concern, but the NPA’s decision to drop fraud charges against finance minister Pravin Gordhan and the release of the State Capture Report may have moved the needle in favour of a wait-and-see stance.

Although the budget deficit is widening and South Africa faces higher debt levels, Gordhan is reducing the expenditure ceiling.

Lings says ratings agencies are very aware that economies go through business cycles and that it could affect tax revenue collection, and therefore pay more attention to expenditure, which is directly within government’s control.

“If you look at the statements on government expenditure [in the Medium Term Budget Policy Statement], those are compellingly positive.”

While government’s plans to raise taxes will hurt the economy, it is seen as a more favourable step than borrowing more money from a ratings point of view. It suggests that South Africa is not putting the investor at risk, Lings says.

Broader support for National Treasury from the private sector, CEOs and civil society also point to meaningful backing to get the economy into better shape.

At the same time there are initiatives to partner with government and the private sector is considering how to initiate more employment and investment.

“All of those [developments] are positive in a difficult environment – probably enough to say let’s see if this gains more traction.”

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