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BUSINESS & FINANCE /  CHRIS JORDAN



          JUNK STATUS – HOW DOES IT AFFECT US?


          By: Chris Jordan



               ince the dismissal   connected to the ruling party”.   of their income offshore, so a   "PARADOXICALLY
               of Former Finance    Adding R1 trillion in debt to   weakening rand increases their
               Minister Nhlanhla Nene   fund a nuclear power plant will   earnings. The JSE All Share   THOSE PEOPLE
         Sin December 2015,         increase the interest payable by   Index has risen 2.05% since S&P
          there has been a great deal of   a further 9%, or possibly more   announced their downgrade on   WITH
          speculation that South Africa   depending on the prevailing   3 April 2017.
          was headed for a downgrade   interest rates.                                  INVESTMENTS,
          of its sovereign credit rating.                     With regard to the exchange
                                                              rate, since the rumours of
          However, through the formation   The unfortunate reality is   Gordhan’s removal first surfaced  GENERALLY
          of Team SA, Pravin Gordhan was   therefore that those who will
          successful in convincing the   suffer most from the downgrade   on Monday 27 March, the rand
          overseas investment community   to junk status and from fiscal   has depreciated from R12.30/$   THE MORE
          and the ratings agencies of   indiscipline are the poor and   to R13.83/$, so those people
          South Africa’s investment case.   the middle class, since the   with money invested offshore   AFFLUENT
          In doing so, he was able to stave   cost of borrowing will increase   are 12.4% better off in rand terms
          off the impending downgrade   and people in these income   than they were before Gordhan   MEMBERS OF
          for more than a year.     categories rely more heavily   was removed.
                                    on credit to subsidise their                        SOCIETY,
          Gordhan’s dismissal earlier in   monthly living expenses. Plus, it   In the Concise Encyclopaedia of
          the year was perhaps linked   will also negatively impact the   Economics, Rob Norton states   WILL BENEFIT
          to the emphasis he placed on   government’s delivery of basic   that the law of unintended
          fiscal discipline, and in order to   services, health and education.   consequences is that the   FROM THE
          understand his intransigence                        actions of people – especially
          on this issue, it is necessary to   In response debt should be   government – always have   DOWNGRADE."
          look at the current government   eliminated to reduce the impact   effects that are unintended or
          budget allocation. Of the   of rising interest rates.  unanticipated. The fact that
          R 1.14 trillion collected in taxes,                 the more affluent members of
          13% was used to pay interest   Paradoxically those people   society will benefit from the
          on loans, 36% on public sector   with investments, generally   current government folly is
          wages, and 14% on government   the more affluent members of   surely a good example of this
          grants. This accounts for 63%   society, will benefit from the   phenomenon.
          of the total budget, before the   downgrade. Rising interest rates
          allocation of any funds to the   mean higher returns to those   Adam Smith, known as the
          provision of basic services.   who have cash in the bank,   father of economics, wrote in
                                    although property prices tend to   the 1700’s of this often quoted,
          In his first public appearance   be negatively affected by rising   but rarely defined, phenomenon.
          after his appointment as   rates.                   Smith said that the actions of
          Minister of Finance, Malusi                         people are always guided by an
          Gigaba casually introduced the   The biggest winners will be   invisible hand towards an end
          rhetoric of ‘radical economic   those who have investments   that was not part of their original
          transformation’. According to an   on stock exchanges, however,   intention, “… that end being the
          article from Fin24, this has been   either local or offshore. The top   public interest”.
          interpreted as the resumption   40 companies listed on the
          of spending with the proceeds   Johannesburg Stock Exchange
          being diverted “… to those   (JSE) earn in excess of 60%





















                             The JSE All Share Index has risen 2.05% since Standard & Poors announced their downgrade of SA on 3 April 2017

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