Cabinet shake-up no reason to cut rating – Reserve Bank chief

South African Reserve Bank governor Lesetja Kganyago. Picture: Siphiwe Sibeko/Reuters
South African Reserve Bank governor Lesetja Kganyago. Picture: Siphiwe Sibeko/Reuters

A narrowing current account deficit, improving economy and stable inflation should help South Africa avoid credit rating cuts in November, central bank governor Lesetja Kganyago said in an interview, playing down concerns over the most recent Cabinet reshuffle.

Growth in Africa’s most industrialised economy has slowed to a near standstill in recent years, hit by corruption and a lack of progress on sorely needed reforms.

Bitter infighting within the ruling ANC has also sapped investor confidence and thwarted efforts to create jobs and reduce widespread poverty.

Kganyago and Finance Minister Malusi Gigaba met the ratings agencies on the sidelines of International Monetary Fund meetings last week in Washington, hoping to convince investors that the economy is on the mend despite the tensions in the ANC.

“On the engagements we had with the ratings agencies, I think we were able to deal with the credit concerns that they had raised,” Kganyago told Reuters in an interview.

“The current account deficit is no longer 7.2% of gross domestic product. It is now around 2%.

"Inflation is not outside of the target, and it’s projected to remain so over the next two years, so you can’t say we would be forced to tighten monetary policy and thus choke growth,” Kganyago said.

The central bank targets inflation of between 3% and 6%. Despite a slight rise in September to 5.1%, Kganyago sees price growth remaining within the target range for the next two years.

The three major international ratings agencies – Moody’s, Fitch and S&P Global – all downgraded South Africa’s sovereign credit rating after President Jacob Zuma fired respected finance minister Pravin Gordhan in an abrupt Cabinet reshuffle in March.

Fitch and S&P now rate South Africa’s foreign-currency rating in sub-investment, or “junk”, territory. But only Fitch has the country’s local-currency rating in junk.

But with Moody’s and S&P expected to review South Africa’s local-currency credit rating in November, some foreign investors are nervous.

If both downgrade the country to junk, that could trigger massive outflows from South African bonds of up to $12 billion.

Kganyago has headed the South African Reserve Bank since 2014, and his team has been praised for its credible response to high inflation and low growth amid the political turmoil.

Despite Kganyago’s positive assessment, one of his deputies, Kuben Naidoo, said earlier this month that the risk of additional credit downgrades was “quite significant”.

President Zuma launched a second Cabinet reshuffle in seven months this week, appointing a close associate to oversee a big nuclear power deal, and potentially adding to political instability ahead of an ANC leadership election in December.

Kganyago said he did not see the reshuffle as a reason to change the country’s rating, but he said it was critical that the government tackle the atmosphere of uncertainty that had gripped the country.

“Uncertainty can’t be a new normal. We’ve got to clear the uncertainty, restore consumer and business confidence, deal with the credit concerns. We have got the ability to put this economy back on a growth trajectory,” he said.

Ratings agencies have warned that a shortfall in government revenues and growing public debt threaten South Africa’s ratings, but Kganyago played down those concerns.

“Even if government misses their revenue target, you are not going to see fiscal deficits like we saw at the time of the recession in 2008, when the deficit shot up to 6.8%,” he said.

The central bank governor, whose term expires in 2019, also said concerns among some investors that South Africa could tighten currency controls in the event of more ratings downgrades were wide of the mark, saying there was “no willingness from our side to do that”. – Reuters

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