The South African economy has endured an exceptionally difficult time of late, following a sustained period of financial mismanagement and an obvious lack of direction. The situation came to a head two weeks ago, when the much-maligned President Jacob Zuma ousted finance minister Pravin Gordhan and triggered a chain of events that led to the nation’s credit rating being downgraded to junk status.
At this stage, it was hard to imagine the situation getting any worse for South Africa and its beleaguered government. In fact, it was suggested that a period of calm and the development of a long-term fiscal plan would enable the nation to slowly recover, and many hoped that this process would start with the appointment of an authoritative new finance minister. Unfortunately, the storm has continued to rage in South Africa, thanks to continued uncertainty and rumors concerning the nationalization of the countries mines and banks.
Where Have These Rumours Come From?
Alarmingly, the rumours have evolved from an opinion piece penned by a senior advisor to the new finance minister Malusi Gigaba. Christopher Malikane advocated in South Africa’s Sunday Times that the government should initiate a state takeover of all banks, mines and insurance companies, in a bid to combine all publicly-owned institution and drive the expropriation of land without the need to compensate the owners. This is as oppressive as it sounds, while it would create the type of volatility that would make long-term recovery almost impossible.
The situation became even more convoluted recently after the new finance minister issued a statement ruling out such a radical change in policy. While he did confirm that the African National Congress (ANC) was working on the development of a long-term economic policy for the nation, Gigaba was adamant that this did not involve the wholesale nationalisation of mines, banks, and other private sector entities. While this is relatively positive news, it has only triggered further confusion in the nation and exacerbated the sense of uncertainty that has gripped the markets and the country as a whole.
In this respect, both the initial claim and the denial have caused widespread volatility for businesses and investors alike. To start with, the prospect of nationalising banks and mines is as counterproductive to growth as it is outdated, while it only likely to trigger further downgrades in the future. In simple terms, nationalisation would lead to a big outflow of capital out of the country, driving the long-term depreciation of the rand and undermining even the most remote chance of private sector growth.
So even though the strategy would benefit online trading, equity investors and local manufacturers in the short-term, it would eventually send inflation soaring and usher in a period of economic stagnation (particularly among the middle classes and those with the potential to reinvest into the economy).
While the finance ministers rejection of nationalisation has been welcomed by some, however, it has left investors and private sector business owners facing an even more uncertain future. This is arguably worse that the impact of nationalisation itself, as it hints that further confusion among senior government ministers and makes the prospect of further downgrades even more likely. This must be considered as a line in the sand for the South African government, while the ANC must continue to focus on the cultivation of a viable and sustainable economic plan for the future.
If Nationalisation is Not the Answer, Then What is for South Africa?
Let’s start our summary with a basic assertion; the notion of nationalisation is the last thing that South Africa should consider the wake of being downgraded by several major credit agencies. At the very least, this would completely devalue the already ailing Rand and create a scenario where the currency would also be downgraded. This would represent a disaster for South Africa, and one that country would probably be unable to recover from for the foreseeable future at the very least.
If this is not the answer, however, it is pertinent to ask what is? While there is no single response that will completely restore the nation’s economic stability, there are a series of gradual measures that will help South Africa in the long-term.
The first of these is to avoid the issuing of mixed messages, as the government must showcase unity if they are to bring stability, hope and encouragement to the economy and the financial markets. Gradually, this will restore political strength and certainty to the nation, while enabling the ANC to create continuity in the treasury’s policy going forward. Credit agency Fitch also cited the need to drive incremental economic growth and increase the value of local currency, as these are important measures when appraising a countries rating.
In the long-term, this will gradually help to restore South Africa to its former glory. In the short-term, however, the government and its new finance minister must kick-start the process by ruling out nationalisation.