Politics hampers foreign investment

Rising political risk carries the threat of disrupting policies aimed at growing the economy, bringing SA closer to a sovereign credit rating downgrade in three months.

Credit rating agencies identified the local government elections and the uncertainty surrounding whether Finance Minister Pravin Gordhan will be charged by the Hawks as the main political risks facing SA.

The country cleared the first hurdle, but the hangman’s noose is tightening on the second one, which has seen the rand take a dive and big money pull out of lending to state-owned entities.

BNP Paribas Cadiz economist Jeff Schultz said the political risk affected meaningful foreign direct investment to SA.

Moody’s has cited domestic politics as the biggest factor that will affect SA’s credit rating.

Co-operative Governance Minister Desmond van Rooyen and Deputy Defence Minister Kebby Maphatsoe, speaking in their capacities as Umkhonto weSizwe Military Veterans Association executives, poisoned the well further by criticising Gordhan.

Capital Economics Africa economist John Ashbourne said tensions within the Cabinet, which posed a risk to a fragile economy, were of great concern to investors.

The rand, like other emerging market currencies, is under pressure from speculation that the US Federal Reserve may raise interest rates before year-end. Unstable domestic politics will add to the pressure.

The Reserve Bank may also resume hiking interest rates if the rand continues to weaken, stoking inflationary fires.

“If a credit rating downgrade does, in fact, lead to continued rand weakness, higher import prices could increase the local consumer inflation rate, leading to more monetary policy tightening by the Reserve Bank,” said Sanlam Investments’ Melville du Plessis.

The ANC losing control of some of the major metros poses another risk, Fitch Ratings warned in August. This increased the chances of the party adopting more populist government policies to tackle rising voter dissatisfaction.

The more populist policies could include costly spending measures that may require that the government breach its spending ceilings, or redistributive regulatory policies that might undermine economic growth.

By Ntsakisi Maswanganyi for BDLive

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