Will South Africa’s Downgraded Status Pull the Region Down?
Concern about the health of the South African economy and its impact on the rest of the continent has been mounting in recent days.
Following the sacking of revered Finance Minister Pravin Gordhan in late March, South Africa’s markets went into a downward spiral as investor confidence took a beating.
A few days later, S&P Global Ratings cut South African foreign debt to sub-investment grade in April.
For its part, Fitch downgraded both the foreign and local currency debt to “junk” status.
Business experts believe that the downgrades will adversely impact the service sector in South Africa, already suffering from economic contraction of 0.3 per cent in Q4 2016.
Jessica Rees-Jones, executive director at civil society group Inyathelo, the South African Institute for Advancement, told Xinhua that about $10 billion will leave the country as investors search for more stable markets elsewhere.
Gordhan was well liked in the business community and his departure upset markets which saw his ouster as a threat to the strength of South Africa’s institutions.
He was replaced with 45-year-old Malusi Knowledge Nkanyezi Gigaba, who was previously the Minister of Home Affairs. He holds a Bachelor of Pedagogics in Education and a Master of Arts degree in Social Policy.
“The cabinet reshuffle [which included Gordhan’s firing] is an attack on the institution of the National Treasury (NT) and as such will trigger multiple downgrades,” warned Peter Attard Montalto, a prominent South African economist.
Such multiple downgrades will pressure South African companies, already reeling from a battered economy in the past three years, to decrease the level of investments they have in other countries in Africa.
Sectors such telecommunications service provision, retail, mining and real estate in neighboring countries are likely to suffer, experts warn.
For now, South African economists acknowledge that the country is in stagnation but are hoping to avoid a second quarter of contraction which technically would trigger a recession.
There are signs that the country will narrowly avoid a recession.
Official data showed that retail sales bounced back in March to 0.8 per cent year on year growth, beating forecasts of a 0.7 per cent contraction.
Better still, South Africa is emerging from one of its worst droughts and expects its maize harvest to jump 87 per cent this year.
The boost in maize output has pushed the International Monetary Fund to predict that South Africa’s GDP will grow by one per cent, not 0.8 as previously forecast, in 2017.