The tripartite alliance led by the ANC may have a point in its reservations on the International Monetary Fund and the World Bank, but South Africa was past the point of any of this mattering.
This according to political economics expert Tsepho Kgadima, who suggested it was “last chance saloon” for South Africa’s economy and socialist ideals would have to wait for economic recovery.
Ratings agency Fitch dropped the country further into non-investment grade (from BB+ to BB) on Friday.
Moody’s had already downgraded the country’s economy to junk status ahead of the financially tumultuous Covid-19 21-day lockdown.
The ANC’s alliance partners’ rejection of getting funding from the IMF or World Bank to fight Covid-19 is “indicative of the dearth of understanding of macroeconomic policy by leaders of the ANC-led Alliance”, said Kgadima.
“The ANC-led Alliance are evidently unaware of their lack of legal tools to intervene and or to prevent this dreaded eventuality. Be that as it may, the recent downgrading of South Africa’s sovereign credit rating by both Moodys and Fitch will result in South Africa’s exclusion from World Government Bond Index and thus trigger a fire sale of more than 40% of the SA Bonds held by institutional investors at a time when the South African Reserve Bank is least prepared and incapacitated to step in.”
Long years of deficit financing in South Africa had finally caught up with South Africa, with National Treasury on the verge of defaulting on its mountain of public debt exceeding R3.56 trillion, Kgadima continued.
As a member state of the IMF, however, South Africa was prohibited from defaulting on its public debt, hence the IMF would have to step in where the South African Reserve Bank should have but couldn’t.
Key members of the ANC, including former finance minister Pravin Gordhan, had previously criticised certain aspects of global financial institutions such as the slanted voting powers in the IMF, which left poorer countries powerless to defend their interests.
According to a 2012 research paper by the Chinhoyi University of Technology in Zimbabwe, macro-economic policy reforms imposed by the IMF on Zimbabwe in the ’90s led to the downfall of small to medium enterprises and ushered in the country’s ensuing economic crisis.
When administrative control over the money market in Zimbabwe was progressively relaxed, interest rates became market driven, as part of the monetary sector reform in Zimbabwe.
The resultant rise in interest rates was likely to have imposed higher costs of borrowing on loans for small-scale enterprises for investment or working capital, the paper said.
The reluctance by commercial banks in Zimbabwe to extend credit to the small business sector, even when they were awash with funds and despite pressure from the government to do so, cast considerable doubts on whether the positive real interest rates would translate into any real benefit to small-scale industries.
Kgadima isn’t the only expert who believes we have reached the point of no return, and several others have sketched some scenarios suggesting South Africa can either sell out to the IMF, or starve.