The unexpected cabinet reshuffle by President Jacob Zuma announced in the early hours of Friday morning caused economic instability in the country, resulting in the freefall of the Rand and consequently catapulting the country’s sovereign credit rating to BB+.
The Chamber of Mines has hit hard on the President’s decision to fire a competent, dedicated and globally well respected Finance Minister, Pravin Gordhan, calling the move “illogical and damaging”, negatively impacting the key institution of Treasury and ultimately the credit worthiness of South Africa’s government.
On Monday evening, Standard & Poor (S&P) cut South Africa’s credit rating from BBB- , the lowest possible investment-grade rating, to BB+ , the rating grade commonly known as ‘junk status’, saying the dismissal by Zuma of Gordhan heralded a damaging policy shift.
Newly appointed Minister of Finance, Malusi Gigaba said earlier today at a media briefing following the downgrade, “The country has no reason to be despondent … This (junk status) is a setback, but no reason to be despondent.”
He added that the country had not abandoned radical economic transformation, and that the challenge in the country was structure of the economy. “We have to pay attention to it,” said Gigaba. “We need to focus on the mining sector and its ability to continue creating jobs.”
Gigaba concluded by saying that South Africa is mainly an economy with a strong financial sector, and that we needed to diversify the economy.
The Chamber of Mines noted that the downgrade was significantly detrimental for the entire country, and that the minister should not just look at individual sectors to try to carry the weight of what the downgrade really means for the economy.
“The downgrade will raise the cost of capital, increasing government and private borrowing costs, increasing the portion of government revenue that has to be allocated to covering debt service costs – thus crowding out other key government programmes, weakening the currency, raising inflation and, ultimately affecting investment, growth, and employment creation.
“The poor will be especially impacted by higher inflation, there will be less resources available for social grants, low investment, limited growth in employment opportunities, and poverty levels will rise,” said the Chamber in a statement.
Nicola Viegi, Professor; school of economics, University of Pretoria commenting on the downgrade to junk status said, “When we changed the minister of finance, we need to consider what that means for the credibility of our institutions, and the credibility of our policy. Sometimes the rating agencies are secondary in this process.
“The problem is that this decision (firing Minister Gordhan and reshuffling cabinet), and the way it was taken, put a lot of doubt about the future policy direction of the Treasury and of the country. This thing of changing the minister of finance at midnight without any significant explanation has created a lot of uncertainty.
“The rating agency picked up that uncertainty and communicated it to the market operators. It was our responsibility to give a clear signal to the market,” expressed Viegi.