Do South African Businesses Downgrade After Zuma's Missteps

South African businesses are on the edge of a downfall because of the wrong decisions that have been made by the President of South Africa, Jocab Zuma in the last few days. South African entrepreneurs are preparing for additional credit-rating reductions to combat proposed financial crises.

Bonang Mohale, a chief executive officer of Business Leadership South Africa said in an interview that “We are expecting further ratings-agency downgrades because all the things that they said we shouldn’t do, the president has gone on to do,”

The conflict between the business leaders, investors and Jocab Zuma is clearly showing the signs of radical fiscal drop-off.Why businesses are preparing for credit rating reductions?

Jocab Zuma’s volatile political decisions are causing economic instability after he fired the investor-favourite finance minister, Pravin Gordhan. This is considered as one of biggest policy blunders that could negatively impact the entire economy of the Country after the implacable recession in 2009.

In 2009, South Africa fell into the recession due to the global financial crises. But this time, the reason for the economic downfall is the president. His erratic moves and wrong decisions are the major cause of economic instability across the country.

Even the industry leaders, economists and business executives say that political and economic crises are reducing sales, affecting the profit forecasts and encouraging prospective customers to invest as less as possible.

The situation could become more devastating because the downfall of non-investment grade is estimating for local-currency debt would exclude the country from global indexes – causing the capital outflows of billions of dollars.

However, the Investors Service of Moody is the only company that have successfully assessed both the country’s foreign-currency and rand-denominated debt at investment grade. Though the signs are not very positive, business entrepreneurs, investors and economists can prepare themselves for the expected financial crises.

Conflict b/w the South Africans businesses and Jocab Zuma

Most of the leading entrepreneurs, business tycoons and even the economists are disappointed by the firing of Pravin Gordhan. In addition to the cabinet reshuffling, business owners seem to be more insecure and uncertain when it comes to earning profits and revenues.

Gordhan’s instant dismissal has been causing a conflict between the industry leaders and the Zuma’s government. People are not in a mood to digest this erratic decision made by the president.

The reason for disagreement is obvious. The ex-finance minister (Gordhan) had made some great efforts to reduce the budget deficit while focused on improving the performance of state companies during his time span. In fact, he also warded off the junk credit ratings and promoted two rating downgrades to non-investment grades to boost the overall economy of the country.

That is why the leading South African businesses, such as Pioneer Food Group Ltd., Old Mutual Plc and other companies have warned that the coming years are very critical for the Country’s political and economic status.

On the other side, the Zuma’s government is on the defensive mode. The spokesman of Zuma stated that other major countries have been struggling too with the boost and recovery from the economic and financial crises.

He also said that there is the least possibility for fiscal and monetary policy to improve growth – their main focus is on structural reform. They believe that reforms could change the structure of the economy (all for the good reason). In fact, the opposing party ANC is also supporting the decision of firing the finance minister Pravin Gordhan.

However, the business leaders are less optimistic. According to them, the unstable socio-political reforms would create more challenging situations for traders. Since most of the government departments and state owned companies are in transition, one could face problems in finalising and closing of their contracts.

And without an economic recovery, the percentage of employment growth and revenue collection may decline and cause a great recession. If you want to seriously recover from the financial crises, you will need to start looking for the capital and find out the ways to deal with the problem of being downgraded.

How to combat the financial crises?

According to Bloomberg’s statistics, around 6 out of 20 countries that have declined to junk status have managed to stabilise themselves. It took three decades to get back out of the financial crises.

As per the financial research agency, the countries who are making an effort to achieve an investment grade rating needs minimum seven years. It means creating the right economic policies ahead of time becomes essential for the improvement of the country's economy.

In simple terms, it is essential to concentrate on growing the overall economy of the country instead of cutting down any unavoidable spending.

To overcome the situation, the government needs to focus on decoupling revenue while improving the budgetary process and economic growth. It can be achieved by creating “rainy day” reserves by the government.

Under this, the taxes or a royalty tax can be imposed while increasing the commodity price to a certain level. Through this, one can use the funds on imperative ongoing Capitals and social projects during the economic crises.

Apart from this, the government should also create powerful economic management mechanisms such as building a sovereign wealth fund for planning the capital investment strategy. The Countries like UAE and Norway have achieved the positive outcomes via creating futuristic economic management strategies.

Growing intra-continental trade can be a great way to overcome from the economic crises. The government of South Africa can use its excellence in manufacturing capacity and services including information and communication technology and banking services to grow their economy.

The government should also adopt a servant-governance approach with the aim to reduce the corruption within the system and remove the pressure from political influence.

These are some measures that would save the South African economy from the situation of a downgrade.