Bruce Whitfield: South Africa, let’s talk Turkey

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The good news is that ratings agency S&P Global didn’t downgrade us deeper into junk on Friday. The bad news is that it remains sceptical about the Ramaphosa administration’s ability to transform the country’s finances sufficiently to justify a return to investment grade any time soon. Don’t let it worry you too much. There is a whole lot of really good stuff happening in the economy.
National Treasury has upgraded its growth forecast and brought it more in line with the market’s own expectations of around 2% – not enough to see meaningful change for the vast majority of South Africans who are hoping for a jobs-led miracle to help them get out of poverty – but it’s going in the right direction.

Probably South Africa’s biggest asset right now is the SA Reserve Bank. Despite many attempts, by among others the Public Protector, to undermine its legitimacy, the SA Reserve Bank succeeded in guarding its independence.

The best lesson for South Africa as to what goes wrong when politicians convince themselves that they can outwit, outmanoeuvre and outsmart markets, comes from Turkey. President Recep Tayyip Erdogan sought to rewrite the Economics 101 textbook recently and has landed his country in all kinds of trouble. His electoral populism combined with recent dollar strength, which also put the rand on the back foot, saw the country come within a whisker of a fully-fledged currency crisis.

As the lira weakened, Erdogan sought to blame an amorphous “interest rate lobby” for currency weakness and said “enemies of Turkey” were lurking in the background of “currency speculators”. Sounds familiar? The logic is not dissimilar to that of the dying days of the Zuma administration and we are likely to see this kind of rhetoric in South Africa as we head to polls by April next year.

For ratings agencies like S&P, they need to see sensible, sustainable structural reforms of the economy before lifting the country from its current relegation zone.

For South Africa, still looking to recover from the consequences of the firing of Nhlanhla Nene as finance minister in 2015, the slide into full-blown junk was narrowly averted in December when the ANC voted by the smallest of margins for the party to be lead by Cyril Ramaphosa rather than Nkosazana Dlamini-Zuma. It gave Moody’s the chance to give the country the benefit of the doubt. Had it downgraded along with S&P and Fitch, the economy would be in a far worse place right now and the country would be staring down the barrel of a recession.

SA’s core strengths

S&P does acknowledge that progress has been made: “The recent political transition and policy proposals could support firmer economic growth and stabilising public finances over the medium term”.

Unlike attempts at manipulating interest rates and the currency in Turkey, ratings agencies see South Africa’s monetary flexibility, which includes a floating exchange rate and well-developed financial markets, as core strengths.

In among the swathes of political progress made in the president’s first 100 days in power, marked on Sunday, there are worrying economic indicators. Chiefly, the level of the currency and the rising oil price – which together threaten a 70c/l petrol price increase next week. In addition to sucking money out of households pockets immediately, it will be negative for inflation months from now.

The Reserve Bank is cognisant of the risks the local economy faces.

As far as Turkey is concerned, its central bank has finally been able to react with a 300-basis point interest rate increase to bring stability to the collapse in domestic confidence there. Erdogan has previously blamed higher interest rates for rising inflation, ignoring a century of economic study which proves the opposite to be true. Its foreign debt has ballooned.

Something SA protected itself from under Trevor Manuel, when he decreed most debt should be rand-denominated to protect against currency shocks.

Bruce Whitfield is an award-winning multi-platform financial journalist and broadcaster.

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