Ratings agencies warned SA

It was only a matter of time. Apart, perhaps, from the swiftness with which S&P Global Ratings acted, a sovereign downgrade to South Africa's foreign and local currency credit ratings had broadly been anticipated.

To be fair to the ratings agencies, they have been more than patient with South Africa, consistently communicating the need for structural reform that would elevate it to a higher, more inclusive growth path.

The downgrade of our debt did not stem from deteriorating macroeconomic fundamentals - they have actually been improving. Instead, rising concerns over political and institutional uncertainty in the wake of the cabinet reshuffle, rising pressure on the fiscus from underperforming state-owned enterprises and concerns that there may be deviations from policy measures that would undermine fiscal consolidation and growth are to blame.

There appears to have been little formal communication in the days before the reshuffle to allay the fears of the ratings agencies. At a press conference last Saturday, despite assurances that the National Treasury would stick to its policy framework, mention was made that it could no longer remain the domain of orthodox economists, big business, powerful interests and international investors. There is nothing wrong with that, but it does raise the question whether this suggests a shift to unorthodox policy, and away from what has spared us from downgrades over the past year.

In the event, S&P had already made up its mind to downgrade us and place us on negative watch. This is a severe blow to the country's and, indeed, Treasury's efforts to improve the lives of all South Africans, and it will inevitably be the poor who carry the greatest burden, as food and transport prices rise on a weakening currency.

In response to the rating action, the 10-year government bond yield jumped nearly 100 basis points and the rand came under severe pressure against all the crosses, losing R1.50 to the dollar alone.

However, the damage could have been far worse. Unlike with the recall of Nhlanhla Nene, the markets had time to digest the inevitable firing of Pravin Gordhan when it was revealed that he had been called back to South Africa from an investor road show in London.

It helped that emerging markets continue to benefit from a global risk on trade in the afterglow of improving global growth prospects. What it does mean, though, is that we have yet again squandered an opportunity to improve our fortunes at a time when the world was offering to help.

The impact on the economy will be felt soon enough as business confidence, which was already weak, takes another leg down, further constraining private fixed investment. Already, growing expectations of interest rate cuts later this year have all but evaporated.

The economic injuries inflicted on South Africans and our economy are collateral damage of extremely untidy political arrangements. The reasonable expectation of a muddle-through scenario of slightly better growth and slightly lower inflation allowing the Reserve Bank to cut rates later this year is unlikely to hold.

Instead, we are now faced with a binary outcome. There is upside potential in the South African economy if domestic politics stabilise and provide an environment that could rebuild confidence. To my mind, this is not likely until the outcome of the 2019 elections.

A more likely scenario is a period of continued intra- and interparty political contestation that depresses domestic animal spirits further, with negative consequences for investment, economic growth, the exchange rate, ratings and employment. All self-imposed and unnecessary.

Nxedlana is FNB chief economist