Don't let the shuffle shake you

This brazen cabinet reshuffle by President Jacob has left most of us in the financial industry shaken and feeling uncertain about the country's economic outlook and stability.

Adding salt to the wound, Standard & Poor’s (S&P) Global downgraded South Africa's sovereign credit rating to BB+ last night. The rating agency says this junk status designation has been taken on the back of political and institutional uncertainty.

Moody’s ratings agency has placed South Africa's sovereign credit rating on review for downgrade on Monday, saying that the decision was prompted by an abrupt change in leadership of key government institutions.

The review will allow Moody’s to assess these risks and if the changes in leadership signals a weakening in the country's institutional, economic and fiscal strength.

Chris Malikane‚ an associate professor of Economics at Wits University‚ said while “there is a lot of hype with the ratings agencies‚ the fact of the matter is that even if they cut the investment rate in South Africa‚ the average South African will not be much affected in the short-term.”

The main thing a downgrade would bring‚ said Malikane‚ was is an increase in the risk premium‚ meaning lenders increase interest rates because of a perceived greater risk in default.

Besides this unnerving news of the downgrade, South Africa has recorded a trade surplus in six of the last ten months. Higher international commodity prices have provided welcome relief to South Africa’s balance of payments in 2016 and early 2017.

On Friday, 31 March 2017, the Department of Energy announced that the petrol price for 95 ULP & LRP will decrease by 24c/l with effect from Wednesday, 5 April 2017, while the price of petrol 93 ULP & LRP will fall by 22c/l. This will in turn reduce the monthly consumer inflation rate by only 0.1 percentage points. 

In conclusion we say 'Keep calm and carry on investing'. In South Korea, after being downgraded to non-investment grade, It took them only 12 months for S&P to restore South Korea to investment grade after authorities in Seoul worked very hard to patch all the loose ends and do the necessary reforms. The South Korean experience has demonstrated that being pushed to non-investment grade is not the end of the world. In a short time (a year), the country rose above junk status as authorities responded to the crisis with the utmost determination and clarity in policy formulation. Crises often breed opportunities to reform and improve economies. SA should not miss this opportunity to introduce structural economic reforms that could unlock the country’s potential to achieve its National Development Plan goals.

But there is a great concern of how to feasibly lift economic growth and attract foreign investment. Despite all this perplexity, Stanlib's Kevin Lings provides some calming wisdom to help settle advisors and ease investors. 

Video courtesy of Stanlib.