The South African economy has endured an exceptionally difficult period of late, following a prolonged period of financial mismanagement and an apparent lack of leadership. The situation came to a head two weeks ago when villainous President Jacob Zuma overthrew Treasury Secretary Pravin Gordhan, triggering a series of events that resulted in the country’s credit rating being downgraded to junk status.
At the time, it was hard to imagine that the situation for South Africa and its beleaguered government was rapidly deteriorating. Indeed, it was suggested that a period of calm and the development of a long-term fiscal plan would allow the nation to slowly recover, and many hoped that process would begin with the appointment of a new key finance minister. Unfortunately, the storm has intensified in South Africa thanks to ongoing uncertainty and rumors of nationalization of the mines and banks.
Where are these rumors coming from?
Disturbingly, the rumors emerged from an opinion piece by a senior adviser to the new finance minister, Malusi Gigaba. Christopher Malikane, speaking in the Sunday Times in South Africa, argued that the government should initiate the state takeover of all banks, mines and insurance companies in order to bring together all public institutions and speed up the expropriation of land without compensating the owners. This is as depressing as it sounds, while creating the kind of volatility that would make a long-term recovery all but impossible.
The situation became even more complicatedrecently after the new finance minister issued a statement ruling out such a radical change in policy. While acknowledging that the African National Congress (ANC) was working to develop a long-term economic policy for the nation, Gigaba insisted this did not include the wholesale nationalization of mines, banks and other private sector entities. While this is relatively positive news, it has only added further confusion to the nation and added to the sense of uncertainty that has gripped markets and the country at large.
So even if the strategy benefited online retailers, equity investors and local manufacturers in the short term, it would cause inflation to spike and usher in a period of economic stagnation (particularly among the middle classes and those who have the potential to invest back into the economy) .
While finance ministers’ opposition to nationalization has been welcomed by some, it has left investors and private sector entrepreneurs with an even more uncertain future. This is likely worse than the impact of nationalization itself, as it points to further confusion among senior government ministers and makes the prospect of further downgrades even more likely. This must be seen as a line in the sand for the South African government while the ANC must remain focused on devising a viable and sustainable economic plan for the future.
If nationalization is not the answer, then what is for South Africa?
Let’s start our summary with a basic claim. The notion of nationalization is the last thing South Africa should consider when it is downgraded by several major credit agencies . At the very least, it would completely devalue the already battered Rand and create a scenario where the currency is also downgraded. This would mean a catastrophe for South Africa from which the country could not recover, at least for the foreseeable future.
However, if that is not the answer, it is pertinent to ask what is? While there is no single response that will fully restore the country’s economic stability, there are a number of incremental measures that will help South Africa in the long term.
The first of these is to avoid issuing mixed messages, as the government must show unity if it is to bring stability, hope and encouragement to the economy and financial markets. Gradually, this will restore the nation’s political strength and certainty while allowing the ANC to provide continuity in future Treasury policy. Credit agency Fitch also noted the need to spur economic growth and increase the value of the local currency, both of which are important measures in evaluating a country’s rating.
In the long term, this will gradually help restore South Africa to its former glory. In the short term, however, the government and its new finance minister must initiate the process by ruling out nationalization.