Red alert on SA junk status, rand rout

Cape Town - If Finance Minister Nhlanhla Nene’s National Budget next week doesn’t convince the rating agencies that the government’s finances are credible and the country gets downgraded to junk status “the rand (currency) will be hit”, economist Iraj Abedian told the Cape Town Press Club on Monday.

“If the government’s budget presentation doesn’t convince the rating agencies that government finances are credible … and as a result of that .. the country gets downgraded to a junk state… the rand will be hit naturally. The currency is first and foremost at the mercy of government finances next week. If that (fiscal) picture doesn’t become credible and convincing for the agencies … if they come to pronounce on it (junk status)… the currency will be hit like never before.”

“If we get downgraded, the currency will reflect that without a doubt,” he said.

Abedian, the chief executive officer of Pan-African Capital Holdings, said the problem was that as soon as a country reached junk status, the fiduciary responsibilities of the provident and pension funds globally disallowed them “to be exposed” to South Africa because it would have junk status. “People sitting in Kuala Lumpur, Istanbul, Los Angeles or London … as the trustees of the (provident and pension) funds (will have to) pull it out. The rules don’t allow (these funds) to be invested in a country with junk status.”

Abedian, who was one of the architects of the Growth, Employment and Redistribution (Gear) programme spearheaded by former President Thabo Mbeki and his Finance Minister Trevor Manuel, was asked that if he were running a tote at what odds would he put the possibility of South Africa being downgraded to junk status after the February 25 budget.

He answered: “As a good economist, I will tell you it is 50-50… we haven’t tested this administration.” With the previous administration (of Mbeki and Manuel), he said, he “could have told you emphatically where they were going to go”. This administration has not yet faced up to the fact that it was facing a tough fiscal environment. “It has not had a (fiscal) test yet,” he said, noting that Nene would be taking that test next week.

READ: SA rapidly approaching fiscal cliff - expert

Abedian said the market was looking for restraint in government spending on social welfare, cutting back on spending on the political gravy train and a contraction of spending on public sector wages and salaries – that is the bill for public servants’ pay cheques.

If he were to stand in the shoes of the finance minister to avoid downgrading of the country to junk status, Abedian said the first order or priority would have to be what policies would provide economic growth “in a credible way… you can’t do magic, if the growth doesn’t happen and the tax revenue doesn’t come in… you are in trouble.”

Another priority would be to plug the “fiscal holes” – the power monopoly Eskom and the national airline South African Airways which were repeatedly asking for big fiscal guarantees. “These are big holes,” he said.

One way of resolving the Eskom crisis, he suggested, was to allow municipalities – including the big metropolitan councils like Cape Town and Johannesburg – to buy their electricity from private sector producers. There was nothing stopping mayors of solvent municipalities from procuring their electricity supplies from sources other than Eskom.

The beauty of the private sector being allowed to produce power – and he suggested that gas-fuelled power stations could be the way to go to ease out diesel and coal-fired plants – was that they invested their own funds in the new plant. It was not that of the taxpayers.

Other areas in the budget which should be the finance minister's focus should be to cut back on the growth of social welfare grants and on public sector salaries and wages. “If you want to avert a downgrade, (Nene will have to) convince the cabinet to stand together … and bring the real wages in the public sector down.”

WATCH: Which way for government on taxes?

It would also be symbolically important to end the stays of the political elite at top-star hotels and being driven around with “blue lights”. This would be “an important part of the credibility of (Nene’s) budget package,” he said.

Abedian said it was likely that there would be tax rises for the rich, although this was unlikely to bear much fiscal fruit at an expected growth rate of under 2%. This, however, could balance cuts in spending that benefited the poor.

Reducing municipal government dependency on Eskom, which suffered from poor corporate governance, was important, he argued. “To the best of my knowledge all municipalities can exercise full control of where they buy their energy from,” he said.

A municipality was likely to have three alternative power options to electricity from Eskom – they were solar, wind and gas-fuelled electricity. Solar and wind were probably too expensive while gas “is predictable and competitive”.

While Abedian did not spell it out, municipalities – particularly those which did not depend on added electricity distribution fees to balance or boost their coffers – could engage in dedicated power purchase agreements with private sector producers for their electricity needs and reduce dependence nationally on Eskom.

READ: Load shedding forces SA to cut reliance on Eskom

Abedian, who is an adviser to the Manufacturing Circle, said the manufacturing industry should have been geared to help take up the employment slack of the end of the commodities super-cycle. But instead, it was facing “binding constraints” and was not producing the goods.

One of the principal constraints faced by manufacturers was the energy problem.  A factory which suffered a two-hour load shedding period, could be set back in work time by four or five hours of the working day. This was devastating for productivity.

READ: Koeberg 'human error' cost economy R7.5bn

* Send your budget tips to Minister Nhlanhla Nene.

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