Further credit downgrades likely if Zuma stays on, says analyst

President Jacob Zuma.
President Jacob Zuma.

Cape Town - A further South African credit downgrade remains “highly likely” if President Jacob Zuma and his Finance Minister Malusi Gigaba remain in their current positions, according to political analyst Jakkie Cilliers of the Institute for Security Studies.

Cilliers, the chairperson of the ISS board of trustees and the group's head of African futures & innovation, made the argument in a recent research report entitled "South Africa’s prospects under Cyril Ramaphosa".

He said that should South Africa's sovereign credit rating be downgraded again, the country would likely be locked into a period of constrained growth.

Moody’s, alone of the three global ratings agencies, still has SA's sovereign debt at investment level. 

Were Moody’s to downgrade SA to junk, the country would automatically be excluded from a number of global bond indices, including the important Citi World Governance Bond Index

"That this decision is important was underlined by RMB Morgan Stanley, that projects a potential outflow of $5bn (R63.6bn) once South Africa is excluded," said Cilliers. 

“Once South Africa’s long-term local currency debt is downgraded by Moody’s, growth will remain constrained for several years and the target of 5% growth by 2023 or indeed of an average growth rate of 5.4% to 2030 as set out by the National Development Plan is unachievable,” said Cilliers. 

Moody's, meanwhile, placed SA's state debt on review for downgrade in late November. 

"The review period may not conclude until the size and the composition of the 2018 budget is known next February. This will also allow Moody's to assess the policy implications of political developments during the review period and the likelihood of pressures on South Africa's key policymaking institutions persisting," said Moody's in a statement at the time. 

Gigaba is set to deliver the budget on February 21. 

Will Zuma be recalled?

One way for SA to avoid a further downgrade is for Zuma to be recalled, said Cilliers, in the same way that former president Thabo Mbeki was.

Whether to go ahead with this recall is one of the key decisions confronting the ANC’s newly-elected top decision making body, the national executive committee (NEC). 

"The longer Jacob Zuma stays in power, the better the opposition parties can be expected to do in 2019. The likelihood of a further downgrade by Moody’s will be dramatically reduced with the early recall of Zuma and the appointment of a new Cabinet, including a new finance minister able to inspire confidence,” he said. 

However, he added that in the light of the narrow election victory of Deputy President Cryril Ramaphosa for the post of ANC president and the split NEC, Zuma may have “earned a few months longer as president of South Africa”.

Two centres of power

Analysts will be paying close attention to SA's two centres of power, one around Ramaphosa and his allies, and another around Zuma and his defenders.  

“[The two centres of power are] important, for Zuma’s announcement on fee-free education only hours before the start of the 54th Conference on December 16 2017 clearly demonstrated the potential damage that he could wreak in the months that lie ahead,” said Cilliers.

Cilliers noted that friction between the two camps would be particularly pronounced around Zuma's "stated intention to press ahead with the acquisition of additional nuclear capacity for electricity".

But despite backing for Zuma In the NEC and Cabinet, Cilliers argued that it is unlikely he will serve out his full second term. 

"The likely process is that the ANC, after discussion and agreement within the NEC, will recall him, requesting him to resign as president of the country, as occurred with Thabo Mbeki in 2008."


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