With an economy spiralling downwards, can South Africa turn things around?

South Africa’s Finance Minister, Pravin Gordhan, gave his budget speech last week.


To those outside South Africa, that sentence may be mildly informative. However, for many South Africans this is just the latest in an ongoing financial saga that threatens to engulf the country.


The Recent Finance Ministry Saga

Mr Gordhan was South Africa’s Finance Minister from 2009-2014, when he was shifted to the Ministry of Co-operative government and Traditional Affairs. His replacement was Nhlanhla Nene, who served as Finance Minister until early December 2015, when he was abruptly removed from the office by President Jacob Zuma. Zuma announced that his replacement would be David Van Roonyen. However, the market reaction to this sudden announcement was so negative that it saw the Rand drop more than 5% against USD in the space of a single day, whilst South African financial indices plummeted. Just a few days later, a chastened Zumaappeared to have back-tracked. Reinstating Mr Nene, even had he agreed to take back the job had had been so abruptly displaced from, would have been seen by many (rightly) as a sign of weakness on Mr Zuma’s part. So instead Mr Gordhan was hurriedly recalled to his old post, being replaced in the Co-operative Government and Traditional Affairs position by none other than – Mr Van Roonyen.


South Africa’s Economy – The Current Situation

Though the South African currency situation is not as quite as bad as it was in mid-January, when the Rand hit multi-year lows against a variety of currencies, the situation continues to remain quite grim, with the exchange rate at more than 20 Rand against the Pound and close to 17 against the Dollar. To be fair, it’s not just South Africa which has been feeling the pinch recently – other BRICS nations like Russia, Brazil and China have also been heavily hit by the recent slowdown in commodities prices.


All Eyes on the Credit Rating

However, Mr Gordhan will doubtless be keen to avoid another downgrade to South Africa’s credit rating. Standard & Poor’s recent move to shift South Africa’s sovereign rating outlook from stable to negative in early December arguably triggered the train of events that lead to South Africa’s current financial situation. Were Standard & Poor’s to go further and downgrade that bond status to ‘junk’, that would potentially place the South African economy in a catastrophic situation. It would seriously spook foreign investors and possibly send the South African economy into a tailspin which could make the current downturn seem gentle in comparison. We will have to see what the next 10 months of 2016 bring.