SUNDAY TIMES - The gossamer thread supporting the rand
Sunday Times Opinion By Bruce Whitfield , 2017-04-16 00:00:00.0

The gossamer thread supporting the rand

So why has the rand not collapsed in a suppurating heap following South Africa's double debt downgrades?

There are a couple of reasons and, if we play our cards right (how many times have you heard that over the past 15 months), we might just be able to stave off a calamitous currency collapse.

So far, just Fitch has put South Africa's foreign and local currency debt into the relegation zone of sub-investment grade. S&P Global Ratings has downgraded our foreign debt only, and because 90% of our debt is in rands, it means it retains a gossamer-thin grip on investment grade. That is a primary reason for a surprisingly modest 10% decline in the value of the rand over the past three weeks.

There is still some R3-billion a day in foreign bond purchases - more than R30-billion has been invested since former finance minister Pravin Gordhan's now-infamous recall from London. That's because foreign bond investors are obliged to buy, given that we remain in several key bond indices.

If two ratings agencies downgrade both our local and foreign debt and we drop out of those indices, you can expect immediate outflows of about R140-billion from the bond market as forced sales are triggered. The currency will be forced to compensate, and we'll be headed for R15/$ faster than you can ask: "What the hell just happened?"

South Africa will be thrown into recession, tax collections will fall, borrowing costs will rise, jobs will be lost and the country would have been economically transformed, radically.

It's only a matter of time before some government spin doctor looks at the recent performance of the market and claims it is all due to the wisdom of President Jacob Zuma's reshuffle. Just watch.

However, far from a vote of confidence, the gains are for all the wrong reasons. Stock markets are rising because South Africa's biggest companies feared this scenario and ensured a greater proportion of their profits came from outside the country.

Investments in global bonds are forced global portfolio flows that will remain in place - as long as investors invest in emerging-market debt, and we remain included in bond indices that oblige foreign investors to put into South Africa a percentage of the money they commit to emerging markets.

When FW de Klerk unbanned political parties in 1990, there was no telling which way the economy would go. When ANC leaders travelled to the World Economic Forum at Davos in the early '90s, it quickly became apparent to the likes of Nelson Mandela, Thabo Mbeki, Trevor Manuel and Tito Mboweni that, while the party's policies were firmly centred around the Freedom Charter, they were not going to draw foreign investment - something debt-laden, sanctions-battered South Africa needed if it was going to become a globally competitive economy.

As Manuel biographer Pippa Green reminded us this week, the new democracy's finance team was eased into running the country's finances before being forced to make big decisions.

In sharp contrast, Malusi Gigaba has been cast into the shark tank of global markets with a bloody rump steak around his neck and stones in his pockets. It will take a gargantuan effort on his part and solid, experienced advisers to not make any serious mistakes. It's gratifying to see the change in tone of the new finance minister, who has successfully softened his early populist rhetoric. He's not publicly used the term "radical economic transformation" since his first hastily called media briefing.

It's not unusual in successfully managed economies for finance ministers to become presidents .

If Gigaba doesn't keep a tight rein on spending, like his predecessors , the presidential mantle will not be one he will want to inherit if that time ever comes.

Whitfield is a public speaker on the political economy and an award-winning financial journalist and broadcaster