Can the State Capture Report tilt us into Junk Status?

The recent unstable political climate in South Africa has been widely reported and its impact on the South African economy expected to be evident. With the release of the State Capture Report, compiled by former public protector Thuli Madonsela on 2 November, South Africans anticipated even more bad economic news and the possible final stamp of “junk status”.

The impact of the report has, however, been quite surprising. Though its larger impact remains uncertain, it is clear that the pessimists might have spoken too soon.

Prior to the release of the State Capture report, Mike Schüssler of Economists Dotcoza held the opinion that if the report found State Capture has indeed taken place, it could cost the South African economy billions. As reported in Fin24, the reason, he explained, was the possible negative impact that it could have on foreign and local confidence in the South African economy and the factor of “trust” that would be influenced.

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This trust factor could not only possibly cause South Africa’s rating to downgrade, but also affect the trust in being able to do fair business in South Africa. According to Schüssler, such trust is lost when faith is lost in institutions and it's Presidency, and thus takes a long time to restore.

The State Capture Report can actually be a welcome change to the political and economical climate in South Africa

After the release of the Report, however, it seems that faith and trust have been restored on other avenues - specifically in the South African Courts (and its independence) and the Rule of Law. It might only be a glimmer, but it is a definite light at the end of a long and dark political tunnel. This renewed confidence could in time see investors and key decision makers deem South Africa a place to invest again.

According to Rob Davies, foreign investors don’t react sporadically to developments as we find in the State Capture Report and will rather to stay due South Africa’s prudent resources.

The impact on the Rand

Christie Viljoen, an Economist of KPMG, also commented in the Fin24 article on the interesting, positive moves made by the Rand prior to the release of the Report, whilst the Court proceedings relating to its release was ongoing. Viljoen is of the opinion that the moves were due to the fact that the proceedings showed, once again, the independence of the South African legal system.

On the morning of the release (2 November 2016), the Rand opened at a strong R13,60 against the Dollar. By lunch time, immediately after the Court’s finding that the State Capture Report had to be released before 5pm, it had strengthened even further to R13.31. After its release, the Rand closed at R13.52 per dollar.

Azar Jammine, chief economist of Econometrix, commented in a City Press article that the strengthening of the Rand could have been as a result of the political developments, but that it could also possibly be attributed to factors relating to the United States’ elections.

The possible impact on South Africa’s credit rating

Christie Viljoen also commented on the impact that the report could have on South Africa’s credit rating. 2016 has seen a lot of news surrounding South Africa’s credit rating. In June, Standard & Poor’s credit rating agency downgraded South Africa’s sovereign foreign currency to BBB-, only one level before “junk” (alternatively non-investment grade) status. This was followed by Fitch Ratings lowering its ratings for South Africa to negative on the same day. Naturally, questions arose as to the even further impact the State Capture Report could have on the future ratings of South Africa.

According to Viljoen, the evidence of the proper functioning of the judicial system could be a bonus in the eyes of rating agencies. They could still, however, be unhappy about the continued, or even possible increase, in political uncertainty and instability.

Leadership around the State Capture Report might be the real influencer on our economy

Dennis Dykes, Nedbank’s Chief economist, is of the opinion that rating agencies are not really interested in what the report actually says, but to see some form of resolution from leadership to lead the country to better policy outcomes and to make positive decisions for economic growth. Because if this, Dykes holds that rating agencies will rather wait and see what happens after the report in reaction to it - giving the situation the benefit of the doubt. This is also supported by Viljoen, saying that the total (net) effect of the report on our ratings will ultimately depend on how the ruling party reacts to it.

It’s about more than only the current economic trends

Jammine cautioned South Africans against optimism that South Africa could avoid another rating downgrade, and also against the Rand maintaining the recent strength and growth. The reality is that even though Zuma’s possible departure and the renewed confidence in South Africa’s institutions are positive, it still does not nullify the structural impediments the South African economy faces.

These structural impediments ultimately prevent South Africa’s economic growth rate from rising to the levels necessary to prevent the rising unemployment trend from continuing.

Key takeaways

Even though the exact impact on the Rand, the economy and our future rating is still unclear, the proof of effective institutions that are seen to be working provides public and business confidence. It “reinforces the impression of ‘institutional resilience’ in the country” according to Professor Raymond Parson from the North-West University School of Business and Governance. But, the South African economy has not yet cleared the woods, and positive developments such as the release of the Report will have to be sustained to see a true turning point.

Get more key insights

If you would like to read more about the latest developments around the State Capture Report and its influence on the South African economy, below is a useful list to start with.

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• Corruption remains a tipping point issue for our economy. Read more here
• Investors are wiser than just reacting to State Capture Report. Read more here
• Interesting surges in the Rand. Read more here
• News24 summarizes ‘the wheelings and dealings’ in the State Capture Report. Read more here
• Moneyweb article on BEE and some State Capture Report findings on ethics. Read more here