South Africa must act now or it’s “game over”

South Africa must implement deep structural economic reforms to avoid being downgraded to junk status, according to finance minister Tito Mboweni.

In a series of statements on Twitter, Mboweni said that if these reforms are not implemented, then it is “game over” for the country’s economy.

“If you cannot affect deep structural economic reforms, then game over!” he said.

“Stay as you are and you are downgraded to Junk Status!”

These reforms are outlined in the finance minister’s economic strategy paper, which he submitted in October last year.

Speaking to the Sunday Times, ANC national executive committee member Enoch Godongwana said the ANC has already made its decision on the reforms, with the final decision resting in the hands of the government.

“The ANC made its decision on the structural reforms in the NEC in September and therefore the ball is in the court of the government to implement the NEC resolutions of September,” Godongwana said.

Effects of a junk downgrade

If South Africa’s credit rating is downgraded to junk status, this could result in a sell-off of up to R118 billion in bonds.

Moody’s cut its outlook on South Africa’s rating to negative in November 2019, following an extended period of load-shedding and problems at state-owned companies – including Eskom and SAA.

The economic effect of load-shedding is a major risk factor in South Africa’s potential junk downgrade, and the early return of rolling blackouts does not bode well for the country’s standing with credit ratings firms.

Moody’s Investor Services, S&P Global Ratings, and Fitch Ratings are also all concerned with the debt of state-owned companies and the state of government finances.

S&P and Fitch have already downgraded South Africa to junk, with Moody’s current rating being the lowest investment grade above junk status.

Load-shedding threat

Load-shedding poses a major threat to the economy, and the return of regular outages is not good news for South Africa’s business environment, particularly after President Ramaphosa promised there would be no load-shedding until 13 January 2020.

Ramaphosa said in December that “from the 17th of December right through to the 13th of January we should not be in a position to have any form of load-shedding”.

However, load-shedding returned only four days into the New Year and made another unwelcome return on 8 January.

The most economically dangerous impact of load-shedding is its effect on industries such as manufacturing, where sentiment is expected to worsen as power cuts continue.

Absa previously said the manufacturing sector subindex tracking business activity fell to the lowest level in almost three years in December, with companies blaming electricity disruptions for lost production time.

Load-shedding can also damage expensive machinery which can be costly to replace and severely reduce the productivity of affected plants.

Now read: What happens if South Africa is downgraded to junk

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South Africa must act now or it’s “game over”