President Jacob Zuma shocked South Africa when he reshuffled his cabinet last week, which included firing finance minister Pravin Gordhan and deputy finance minister Mcebisi Jonas.
This sent the rand plummeting from an already weak level, following Zuma’s order for Gordhan to return from an investor roadshow in London earlier in the week.
Zuma’s actions were criticised by business, civil society, opposition parties, and the ANC.
ANC Secretary General Gwede Mantashe expressed unhappiness with Zuma’s decision, saying he feels the list of new ministers was “developed somewhere else and it’s given to us to legitimise it”.
Deputy president Cyril Ramaphosa said he was also unhappy, especially with the removal of Gordhan.
The SACP, which is one of the ANC’s alliance partners, called on Zuma to resign.
ANC stalwart and former minister Barbara Hogan said Zuma has “sacrificed everything we have stood for, on the altar of corruption, greed, and more greed”.
Zuma’s latest cabinet changes have been described as an attempt to capture the Treasury to serve his and his friends’ needs.
How Zuma’s actions broke the rand
Zuma’s actions have also weakened the rand in the past, most notably when he replaced former finance minister Nhlanhla Nene with Des van Rooyen in December 2015.
The graph below shows the volatility of the rand over the past 18 months, which started after Zuma fired Nene. (Click to enlarge.)
Debt-to-GDP at an all-time high
South Africa’s debt level is the highest it has ever been, and with a looming ratings downgrade, which will result in higher interest on this debt, the country is facing a tough financial situation.
Debt-to-GDP, a ratio between government debt and the country’s gross domestic product, is an accurate indicator of the problem.
A low Debt-to-GDP ratio represents an economy that “produces and sells goods and services sufficient to pay back debts without incurring further debt”.
In South Africa, the opposite is happening. Economic growth has slowed to just above 0% and government spending is increasing.
South Africa was making excellent progress under President Thabo Mbeki, but then the financial crash hit and Zuma became president.
South Africa’s credit rating
Under Zuma, South Africa’s credit ratings from major agencies – Fitch, S&P, and Moody’s – has declined significantly.
Many analysts have predicted that a downgrade to junk status is inevitable following Zuma’s decision to fire Gordhan and Jonas.
The impact of a downgrade on the economy will be severe, with higher borrowing costs for the country.
This means the country will have to spend more money to service its debt, which will leave less money for infrastructure developments, grants and healthcare, and generally improving South Africa.
Lower investment into the country will also result in lower GDP growth.
Standard Bank’s chief economist Goolam Ballim said sub-investment status will result in a recession for South Africa.
The graphic below shows how South Africa’s credit ratings have changed since 1994.
Fitch, S&P, and Moody’s ratings were used, measured over the terms of South Africa’s democratically-elected presidents.