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Deeper into the Morass

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Deeper into the Morass

12th April 2017


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Before we talk political economy, let's first go technical and unpack the S&P and Fitch downgrades.

S&P has downgraded South Africa's foreign currency debt and Fitch both the foreign and local currency debt to sub-investment grade or “junk status”. This distinction is important. Foreign currency debt is now junk while local currency debt not (yet).


The South African government issues bonds both in local and foreign currency. Most of the debt issued by government is in local currency. Foreigners thus bring in their currency, convert it into rands and then buy bonds issued by government. Foreign currency debt is incurred when the South African government issues bonds in a foreign currency like dollar, euro or yen. Of the two categories, the local currency is by far the biggest and most important for financing ourselves. Local currency debt is about 90% of all debt, while foreign debt is approximately 10%.

Local currency debt is still investment grade according to two of the three ratings agencies, Moody’s and S&P. That may well change. Moody's has South Africa on a negative watch and is reviewing both the country's local and foreign currency ratings, S&P also has a negative outlook. So at this stage we have mixed ratings, junk on foreign currency and still an investment grade on local currency, with reviews pending.


As long as local currency ratings by S&P and Moody’s are not sub-investment or junk, South Africa still qualifies for inclusion in the World Government Bond Index (WGBI). (In a funny hierarchy of relevance, Fitch does not count for the WGBI.) Foreign funds can still buy South African bonds and money will still come into the economy.

However, if S&P and Moody’s downgrade our local currency debt, or, if index manager`s exercise their discretion to exclude SA, the country will be dropped from that index and big investment funds will be barred from buying SA bonds. In fact they will be obliged to sell what they hold – in effect disinvest. That is when the music stops.

Even though local currency debt is not junk, the interest payable on it has increased from less than 8.5% before Pravin Gordhan was recalled from London, to 9% on Friday 7th April.

Hmm... half a percent is not much, I hear some people say. On a full year's borrowings by government it amounts to about R2.6 million per day… for 365 days. That is about 8 000 RDP houses (21 houses a day) or support for about 24 000 students from the "missing middle" to go to university. Small change it is not.

Furthermore, the currency has also moved from R12.33 against the US dollar the morning before Pravin was recalled from London to R13.75 on Friday - a depreciation of about 11.5%. The petrol price is likely to increase next month.

The biggest impact is of course on economic growth. Imagine if the governor of the Reserve Bank were to announce an interest rate increase of 0.5%. That would really hit the economy in the stomach. Effectively that is what has happened. The cost of borrowing long term money has gone up and in due course the consequences will work through the economy.
Apart from the cost of money, the reshuffle is a massive blow to confidence, as we are certain to see from confidence indicators over the next few months. Confidence is a precious ingredient of growth. Foreigners and their inflow of money are important to cover the current account deficit, but most investment still comes from locals. Losing their confidence is not a great way to get their investment. Less investment, means less growth.

We go deeper into the morass of low growth and stagnant incomes. A wrong direction, period.

Per capita incomes in South Africa are now where they were in 2013. 2017 is the fourth year in which population growth will exceed economic growth and 2018 will now probably become the fifth – essentially Zuma’s second term will be one of stagnating and declining incomes. With stagnant incomes, a key pillar of societal progress having been knocked over.
In the long run no society can endure income stagnation, as Brexit and Trump have indicated. In South Africa the manifestation of the consequences of stagnation may well be a swerve towards populist politics.

In the aftermath of the cabinet reshuffle, Zuma proved his complete dominance of the ANC. All his opponents had to back down, the ANC closed ranks behind him and the ANC parliamentary caucus issued a press statement to say its members will not vote for a motion of no confidence. Precisely what happened in those Top 6 and National Working Committee meetings on Monday 3rd and Tuesday 4th April for Mr Zuma to get such complete control is unclear, but what is certain, is that it was two days that changed SA’s trajectory going forward.

The ANC policy conference is scheduled for the end of June. The conference will consider policy papers already released for discussion and adopt policy positions, which must then go to the elective conference in December for final approval.
The policy papers are moderate and did not create a stir when released. Even some “rightwing-ish” think tanks nearly welcomed them. Given the Zuma faction's newly established power, to what extent will they impose more radical policies on the ANC?

The policy conference is where the fight between the two sides of the ANC will play out. The side that wins, or the compromise that is reached, will be vital for South Africa’s future.

It is unlikely that there will be any further pushback against President Zuma from inside the ANC over the next few months until the elective conference. At the conference his base will support Mrs Dlamini-Zuma and it will likely come down to a contest between her and deputy-president Cyril Ramaphosa.

The motion of no confidence in parliament on 18 April is unlikely to succeed.
Several court cases involving President Zuma are still outstanding and they will probably be concluded towards year-end. They may or may not have a political impact.

In the 2014 election the ANC got 62% of the vote and in the 2016 local government elections just under 55%. What could the ANC get in two years' time, in 2019? That we do not know, but the variables are clear.

With the Zuma faction firmly in control within the ANC it is unlikely that Julius Malema and the EFF will return to the fold by 2019. The EFF will fight the election in opposition to the ANC. Cosatu’s and the SACP’s calls for Zuma to resign may cause some alienation and persuade some people to vote differently. As for a possible split in the ANC, let’s wait for it to occur.

If the EFF and DA can navigate their own internal divisions and avoid possible implosions, they should gain further ground in 2019 at the expense of the ANC.

In fact, for both parties Zuma is the gift that keeps on giving, and they probably welcome the ANC keeping him in power. I think it is therefore unlikely that the ANC will go from 55% back up towards 60%, rather the other way, down towards 50%. But for confirmation we will have to wait for 2019.

The cabinet reshuffle ten days ago was not just a reshuffle; it was also the fifth attack on the Treasury, which started with Nenegate in December 2015 and was successful this time. Zumaites are now in complete control of the Treasury and they will no doubt gain further control when filling the vacancy of the director-general. Like Pravin Gordhan, Lungiza Fuzile is an honest and competent man, and a trained economist to boot.

Whether South Africa’s local currency debt also gets downgraded will largely be determined by how the “new Treasury” conducts itself. Time will tell.

It is a supreme irony that an institution which was 100% built up in and by democratic South Africa is now being attacked and undermined by forces in that same democratic SA.


  • The cabinet reshuffle and consequent foreign currency downgrades were an unqualified set-back for South Africa’s development. If it is followed by further local currency downgrades, South Africa’s growth path going forward will become even harder.
  • Even at this point, before any further downgrades, the cost of borrowing has gone up and the currency depreciated.
  • South Africa’s development has been retarded by four years of stagnant incomes pushing us towards a morass and further stagnation will get us deeper into it.
  • Stagnant incomes create room for populist policies and Zuma’s control of the ANC has increased the risk of that. Precisely how it will play out we will have to wait for the policy and elective conferences to see.
  • The ANC has reached a precarious cross road; its internal contestation over the remainder of the year will be critical for South Africa’s future direction.

Written by JP Landman, Political Analyst


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