EDITORIAL: Not being Turkey is not enough to avoid road to junk status
SA has no time to waste in reversing the dismal growth performance
The rand has gained about 3% since March 28, the day before Moody’s Investors Service decided against issuing a scheduled review of SA’s rating. That has made it the best performer among major currencies. At the bottom, Turkey’s lira has dropped 1%.
This might be good news that indicates the investment community is beginning to differentiate between emerging markets, rather than seeing them as a homogeneous grouping that move in tandem irrespective of local differences.
The SA Reserve Bank alluded to this after the last meeting of its monetary policy committee, in which it decided to keep the repo rate unchanged at 6.75%. Whether that was the correct decision, taking into account how the inflation outlook has improved since it raised the rate by 25 basis points in November, is something that will be subject to debate for some time.
One of the things that differentiates SA from Turkey, which Moody’s Investors Service has in the junk bracket, is the existence of a truly independent central bank.
In previous meetings the Bank had made much of actual and potential volatility in emerging market currencies and how this could affect the value of the rand, a major factor determining price pressures in the economy because of the impact on the cost of imported goods such as oil.
In a change in tone, it noted in March that emerging markets had generally benefited from signs that major central banks would refrain from raising interest rates. On the future, it simply said currencies “from countries with stronger macroeconomic fundamentals are better placed to benefit from these developments”.
One of the things that differentiates SA from Turkey, which Moody’s has in the junk bracket, is the existence of a truly independent central bank, irrespective of whether we agree with its individual policy decisions or not.
Attacks on Turkey’s central bank by President Recep Tayyip Erdogan, who has also appointed himself head of the country’s sovereign wealth fund and made his son-in-law finance minister, was seen as one of the major factors behind the lira’s dramatic slide in 2018.
The central bank is now battling an inflation rate of about 20%, and in March had to take unconventional measures to prevent investors from selling the lira, which only served to spark another drop in the currency.
Reminiscent of the latter part of Jacob Zuma’s presidency, voters punished Erdogan’s party in local elections, though it’s not as accepting of the results. Officials have ordered a recount in several parts of Istanbul, the largest city in the country, after the AK Party contested its loss.
Perhaps Moody’s judged that Turkey is not the sort of company SA should be keeping, a factor underlined by the agency noting the strength of the country’s banking sector and the relatively small portion of the national debt denominated in foreign currencies. The bigger message from Turkey is that those who would play politics with our institutions should cease and desist.
However, before we pop the bubbly corks, another report that came out on Wednesday painted a more depressing picture that shows why SA is far from being out of the woods. This was also clear from the Moody’s credit note, with its warnings about the debt and growth trajectory. The African Development Bank (AfDB) report was actually good news for the continent, even if that only served to highlight the trouble we are in.
While SA is stuck in a never ending low-growth trap, with Moody’s expecting GDP to expand just 1.3% and 1.5% in 2019 and 2020 respectively, the rest of the continent is leaving us behind. Africa’s economies are expected to grow on average 4% in 2019, which would be the fastest in about seven years, the AfDB said. according to the African Development Bank.
Instead of being an engine, SA emerges as a drag, together with Nigeria. Not being Turkey isn’t good enough, and SA doesn’t have any time to waste. Without a reversal of the dismal growth performance and the malaise in state-owned enterprises, the fiscal situation will only get worse, leaving us on the road to junk status.