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Is “junk” status as bad as is made to sound?

By Mpho Ramonotsi

Below is one of the submissions for the Think For Yourself competition which, although did not win the competition, the Black Opinion Editorial Collective felt was thought-provoking and generally compelling.

Most comments and analyses regarding state capture by the Guptas, the Ruperts and ratings agencies is all bad news. ANC has allowed this from the dawn of democracy and the Guptas are the newest addition but they are nowhere near the likes of the Ruperts and the Moody’s as yet, perhaps they may be getting there fast. But the so called “white monopoly capital” have found the Guptas convenient for them so they can deflect attention from their even more devious capture.

Is “Junk” status as bad as is made to sound?

As we speak, South Africa has borrowed R2.2 trillion from various people and institutions. Out of this money that the government owes, it must pay interest, just like you and I when you borrow money from the bank or bo-mashonisa. Remember, Brazil, Russia, India, etc. are all “junk” as well or there about. Just as majority of Capitec customers are also having junk status through the eyes of the banks.

Out of the R2.2 trillion that the government owes, only R220 billion comes from foreign investors (only 10% and it is this 10% that has been downgraded to junk status) the rest comes from South Africans themselves. Notably from government employees through their pension fund and some from other South Africans also mostly through their individual pension fund.

Why “junk” status?

Wayne McCurrie wrote an article on Moneyweb (Tuesday 11 April 2017) “Understanding junk status and forced sales“. He says the reasons given by the agencies for the downgrade are quite clear in his view. He stresses the possibility that “a downgrade may have occurred without the reshuffle, but even if this was the case, taking the most favourable view possible, the reshuffle brought the downgrades forward significantly.”

“A junk status is not automatically a death sentence. If adequate steps are taken, investors will quickly forget about junk status and life will carry on. If this happens, actual upgrades will take time to happen, but the market will ignore this,” he says. He also points out that: “Plenty of countries have survived junk status. A very powerful argument can be made that junk status was actually a blessing for many of these countries, because it forced change. Junk status can, however, be a death sentence if no action is taken.”

In our case, I think the forced change that is required is diversification of the economy to be more inclusive and meaningfully transformed to favor the black majority.

McCurrie tries to reflect that, “the danger is not the junk rating given by the agencies. Rather, it is the set of circumstances that resulted in the junk status that are the danger. The agencies simply report on and quantify the problems. The rating status itself does not cause the problems. There have been plenty discussions that a junk status causes a recession.” He believes that this is largely incorrect. In his view, most circumstances the reason for a junk status was that (for whatever reason: internal or external) an economy was already heading for a recession (“with or without Pravin Gordhan”) “and” (with all the negative implications for bonds implicit in this) and the agencies (because of this recession) downgraded to junk. They simply gave their view of the set of (negative) circumstances that were already in place and evolving.

He concludes that unfortunately for us, the reshuffle itself was clearly given by the rating agencies as the reason. “When” we were actually growing “and” things were getting better. All else being equal (mainly no collapse in commodity prices) the danger of junk status was most likely behind us up until two weeks ago.

We are told that Zuma’s actions will make foreign investors pull their money out of South Africa, it looks like their money is only 10% anyway on government debt. To try put some perspective, if next year you don’t increase social grant payout (by way of bad illustration: say you refrain from normal annual increase), you can give back all these foreigners their money back if they want it back. As for the rest of South Africans we don’t want our pension money just yet, only when we retire.

Perhaps the Russians and Chinese can also have appetite to buy our government bonds if the West wants to sell it.

Gordhan was bad news in the radical economic transformation project. Time will tell if the new guard that Zuma put in power will follow suit. I’m worried that Malusi Gigaba has already indicate a desire to maintain these anti-economic growth and anti-transformation policies that the ANC has been following since 1994. In the past, the lure of globalisation rhetoric was used to derail us from real inclusive economic transformation, now I fear the Guptas state capture is being used to derail the same project. I am not saying the state capture does not exist, but the people of South Africa cannot be held hostage and maintain policies that are a strangle hold on poor South Africans.

In any situation when the risk exists, you don’t shut down or leave under substandard conditions because of the risk identified, you find ways to manage the risks while staying the course of inclusive economic transformation.

It is impossible to create more jobs without radical economic transformation. Previous regimes at national treasury have preferred established business, mostly white owned or foreign owned, over black emerging companies with a misguided assumption that big business that emerged from apartheid can grow the economic pie and gets inclusive with time. These white owned companies have consistently hoarded their earnings from government by investing exclusively on financial instruments or off shore, without regard to investing such earnings back to the economy to increase the size of the pie as also lamented by S&P on its recent downgrade.

One wonders how come the leadership of national treasury does not realise this given their “competency” in macro-economics?

Studies under former president Thabo Mbeki on illicit out flows of money show that South Africa lost R330 billion a year through mis-invoicing by big business, the likes of Lonmin, MTN, De beers, etc. This was made possible by the ANC policies that relaxed exchange controls and allowed these South African companies to establish financial head-quarters in London under the guise of globalization. Many countries such as Malaysia, Cyprus, Venezuela, etc have since re-introduced exchange controls successfully after they realised their mistake to relax them in the first place based on ill advice from grading agencies and IMF. Putting back exchange controls prevents these companies to drain the economy off foreign reserves and forces them to keep money locally where it can circulate a bit more and be used to stimulate and promote economic activity as opposed to mere financial instruments. Such a move will also favor lower interest rates as purported by the Keynesian model. And as such throttling cash out flows will also stabilise the Rand as the spread of the rand volatility will be reduced.

Gordhan and his clique at treasury have always put a huge gamble on the commodity export, such as platinum, coal, gold, etc. I like the illustration of Professor Patrick Bond on Talk702 where he took an example of coal export. In 2008 coal was selling at $170/t and today is close to $50/t. But still Gordhan and his clique at treasury in the 2017/18 budget planned to spend R292 billion on a corporate infrastructure subsidy to build big rail roads to take coal from Mpumalanga, Limpopo, and KwaZulu Natal down to Richards Bay and South Durban Port.

Professor Bond explains that this is the type of white elephant infrastructure projects that are used to support big business to export our coal at next to nothing prices. This subsidy of white monopoly capital could have sounded better when coal was selling at $170/t but I also wonder how Pravin Gordhan could have really justified such a subsidy in 2017 at coal price of $50/t.

The Professor notes that prudence approach would have been to spend that kind of money on issues that are igniting service delivery protests such as electricity generation and distribution, water and sanitation, roads, health, education (#feesmustfall), housing, and the likes. But Gordhan’s response to deal with service delivery protests was to increase the police budget by R600 million to safe guard the R292 billion he reserved to subsidize white monopoly businesses and of course to protect the national executive as well, but the big business that Gordhan is subsidizing is ever ready to take all that money offshore at the expense of the Rand collapsing and interest rate going high.

Suppose the move by Zuma to reshuffle National Treasury will cause suffering to the multitude of South Africans by prompting high petrol prices, as the rand falls against the dollar (needless to say: we have seen the Rand worse even during Gordhan’s tenure) but since we buy petrol from “Saudi Arabia”, maybe is time for government to build another SASOL so we don’t have to go to “Saudi Arabia” for petrol.

If we use this opportunity to build another SASOL, we will employ more people to run new SASOL and new coal mines that will be required to supply the “new” SASOL (This is the right type of infrastructure Gordhan should have considered), our unemployment will come down, people will get jobs (meaning more money for pensions which will then be borrowed to government so they don’t have to borrow from foreigners). In any case, currently about 50% of all the fuel used in South Africa comes from SASOL. Why not make it 100% when that comes with less money we need to borrow from foreigners and employing more of our people in the process as an added advantage (Again in that way the Rand can also be protected as 33% or our foreign exchange requirements is needed to buy petrol).

Some say Zuma is desperate to buy nuclear plants. There’s is no country in this world that has a developed economy and does not have nuclear power including Germany. No country can ever hope to develop if it doesn’t have water, cheap electricity and roads. Why did Gordhan and the clique of elites he represents within Treasury and outside stop building power plants and we ended up with load shedding (jobs were lost big time, and the money he was trying to safe for all those years whilst refusing to build power stations in the name of “fiscal prudence” was lost in one year more than twice over)?

Besides, building nuclear plants will also give people jobs and make electricity cheaper, why spend R290 billion on subsidizing big business so they can export coal at prices next to nothing. Solar is expensive, we know at present electricity from Eskom is expensive after recent numerous upwards price revisions, but try replacing it with solar or wind power, you will pay 3 to 4 times as much. The so-called investors in renewable energy instead of lowering the cost of solar and wind power, they want Eskom to increase its price and shutdown coal power stations so they can look cheaper and they don’t want us to have nuclear power cause is impossible to compete against its costs over a long run. That’s why all developed countries have nuclear plants and are still building them, like U.K., France, even Saudi Arabia that has all this oil and gas.

Nuclear power has safety risks but risks are there to be managed. Which is better, the people dying painful slow deaths born of poverty or the risk of nuclear accidents that may or may not happen?

We need the leaders that can do all these things. Gordhan was gonna have none of it! His mission was to prevent us from being graded “junk”, but the grading he’s devoted his life to protect at great cost to poor South Africans that don’t have jobs, has never created a single job for ordinary South Africans.

These grading agencies had succeeded in convincing Gordhan to cut government spending by reducing social grants and firing government employees (creating more unemployment and suffering to the poor), yet encouraging him to spend money on subsiding big business. How can that be good medicine for an ailing economy! Government must intervene, forces of the market have been given a chance to create jobs for the last 20 years, but instead money is being hoarded in banks at the expense of the economic growth and Treasury has never seen anything wrong with that. Hopefully the new leadership wil take heed and implement radical economic transformation with vigour and purpose.

There are those that are quite vocal about the Guptas’ state capture while mute, completely mute about white monopoly state capture, those two phenomena are both equally bad. But the obsession about the Guptas is suspicious. Any leader, whether in the ANC or otherwise, can turn into an overnight sensation if he criticizes the Guptas in public (not that they don’t deserve it).

The Guptas are not without faults and we should reject them, but more importantly they have brought to the fore the concept of state capture and this scares big business state capture’s as some other people will likely take the Guptas lead if they are allowed to succeed in their businesses which seem to have legitimacy in their own rights if those who owns the likes of Capitec, ABSA, SASOL, etc have managed to legitimize their beginnings (All of those stole money through corrupt relationship with the state to start those businesses, Treasury and reserve bank were quite instrumental in enabling these state capture’s to succeed).

If this reshuffle is going to re-start derailed radical inclusive economic transformation in earnest whilst keeping prudent physical stance (balance budget), then we should all support it. Ordinary South African have been lied enough. Enough is enough.

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