The South African Ratings Downgrade

So it has happened.
The Ratings Agencies have started the downgrade of South African bonds to sub-investment grade, and the trickle that started more than a year ago, with the Nene Gate affair is starting to turn to a torrent. The government-friendly commentators have explained to the gullible public that the downgrade is of no great significance, and is, in any event, the result of a manipulation by White Monopoly Capital and the (unspecified) foreign ‘agencies’ that are working tirelessly to bring about ‘regime change’ in the country, a loathsome thought that is expressed by ANC spokespersons as akin to a ‘counter-revolution’. They completely ignore the fact that the downgrade implies that most of the largest suppliers of funds to the South African Government, and, by implication, any investment entity in South Africa, such as State-Owned Entities, banks and insurance companies, will be obliged to abstain from such lending and investment, cutting off a very significant part of the capital available to the country to support its programs, and also to dispose of any such investment before the next reporting time. The penalty for holding a South African investment is the substantial decrease in the valuation of such investment, in certain cases to zero, forcing the institution to provide additional capital to remain financially solvent. The only exceptions to this rule are the South African banks, insurance companies and pension funds, which have the right to value South African Government securities at 100% of face value. This right does not, however, extend to the valuation of their own securities by foreign investment entities, which will apply the valuation rules as though the investment by the South African entity was made by that body in the Government directly.

The effects of all this will take a short time to work through the economy. The first effect will be on the Rand, which has already started to feel the effect, within minutes of the announcement of the downgrade. The investors are taking into account the helter-skelter disposal of South African investments, almost certainly to South Africans, as there will be practically no other takers. This will be followed by a dramatic drop in the value of such securities as the investors unload them for whatever they can get, leading to a dramatic increase in the yield on the bonds. Practically no new securities will be able to be sold abroad, cutting off the lifeblood of the economy, and the interest payable on borrowings by the Government and others will increase dramatically, first because of the increase in the rate payable and second because the Rand exchange rate will move down, increasing the financial burden of such borrowers in servicing such loans. It is a not-so-slow earthquake of financial disasters for the country and its long-suffering taxpayers. The Government will attempt to compensate for this reduced flow of funding by imposing strict Exchange Controls, trapping the local wealth built up by years of hard work, imposing investment requirements on pension funds and insurance companies and, ultimately printing more money. The rate of inflation will skyrocket, with 25% pa being a desirable target, in contrast with the 3 000 000% of Zimbabwe, and South Africa will have no friendly neighbours to supply electricity without payment,, a factor which has gone a long way to support the Zimbabwe kleptocracy.

Zuma announced very arrogantly during his State of the Nation Address that he was not concerned by what the Ratings Agencies are saying about South Africa, because BRICS is about to establish its own ratings agency, which would support the BRICS nations. How meaningless that would be is apparently not apparent to the economically-illiterate President. A rating by a unit of a body consisting of South Africa (insolvent), Brazil (insolvent), Russia (Insolvent), China (in decline) and India, the sole rising star in this gang of dictators and economic incompetents is unlikely to carry any weight against the verdict of three established and respected Ratings Agencies. However, it suits his playbook of the evil, grasping capitalist nations of the West, and so truth is a secondary consideration, if it is considered at all by the ANC.

After the first effect has taken hold, the Government, still oblivious to the extent of the earthquake their leader has set in motion, will continue to buy votes by upping the social grants, already a subject of contention after the convicted criminal and incompetent, but favoured by Zuma, Minister Dlamini carefully ignored or three years the explicit Order of the Constitutional Court to develop a means of paying the social grants itself (response by Zuma: Crisis? What crisis? only two weeks before the payment system was to implode). The first days of payment in April resulted in many errors, including non-payment and short-payment to indigent recipients, notwithstanding that the payments were made by the same company using the same database as before, leading observers to ask how often that occurred in the past (bearing in mind that a non-payment for a month of ten per cent of the R1 billion per month – R100 million – invested at ten per cent per annum delivers a bonus of R10 million per annum to the paymaster and its associates). It seems unlikely that such errors were ever reported to Parliament or the oversight Committee, and it is close to impossible that the Minister or her crooked boss would have attempted to check on this. A continuation of this practice by these insensitive people is likely to precipitate an uprising by a large number of the now-sensitised recipients, and there are 17,5 million of them. This payoff by the ANC could easily turn into a huge millstone around the neck of a Party struggling to stay afloat. That risk will increase as the flow of funds to the cash-hungry ANC leadership, now desperate to rake off as much as possible before the crunch comes, declines.

At the same time as this problem starts accumulating to alarming proportions, companies – State-owned as well as private – will start to collapse, starved of cash. Jobs will be lost by the thousands, South African Airways will no longer get guarantees of any value from the Government and will default on its existing loans, some R17 billion of them, and defaults on essential maintenance, already in question, will multipy. The same will happen to the SABC, Denel, MossGas, Eskom, PRASA, Sanral, Transnet and all the others that have been playing fast and loose with taxpayer money, paying finder’s fees to the ANC and overpaying for contracts rigged by the dishonest and incompetent ANC cadres. The banking industry, much vaunted as one of the mainstays of the South African economy, although much vilified by the State President and his unthinking lackeys, will contract, selling off foreign subsidiaries to recover the cash value in them before their ownership brings them down, while increasing interest rates – 21% to 25% is not unknown in this country under a similar Government – and so bringing about a further collapse of the building industry, as well as a dramatic escalation in the number of borrower defaults, which will help to add steam to this perfect storm.

Within a year at the most, the South African government will be insolvent, with defaults on the payment of capital – previously easily rolled over – and interest becoming a reality. The hard work of Manuel, Nene and Gordhan in stabilizing the economy, to the limited extent permitted by their communist leanings, will be forgotten in this increasing disaster. The International Monetary Fund will be forced to step in to prevent the spread of the rot infesting first the rest of Africa and then the rest of the world. South Africa will, once again, become a pariah State, the vision and legacy of Mandela drowned under the discovery of the sleaze that was the ANC under Jacob Zuma. Strict austerity rules will be imposed. Everyone will become poorer, and the country will be set back at least twenty years in its economic development, the hopes of 1994, that the country will be a leader in Africa, will be forgotten for another five decades, and along with it, the struggle to keep alive will increase the racist divide that was anathema to Mandela, but was a hallmark of both the Mbeki and Zuma regimes. The spectre of civil war, on tribal and racial grounds will loom, with a high probability that either China or Russia will provide ‘peacekeeping forces’ in the achievement of the goals that Zuma has been pursuing so avidly.

The chance that Jacob Zuma will live to regret his actions is small. The likelihood is that he, in company with at least several of his co-conspirators, will be hanging from lampposts outside his compound at Nkandla. That is the African way.