March 31, 2017 / 2:43 PM / 5 months ago

Gordhan exit is dual blow for South African debt

FILE PHOTO: Pravin Gordhan, minister of finance of South Africa, attends the World Economic Forum meeting in Davos, Switzerland, January 19, 2017.Ruben Sprich/File Photo

LONDON (Reuters Breakingviews) - Pravin Gordhan’s exit is a double blow to investors in South Africa. The ousted finance minister had a plan to tackle the overall size of the country’s debt pile, and control its cost of borrowing. Following his sacking late on Thursday by President Jacob Zuma, those reassurances for providers of capital have been ripped away.

South Africa’s debt, at around 50 percent of GDP, is way below those of other westernised countries – the United Kingdom’s is heading towards 90 percent. But a quarter of South Africa’s potential workforce is unemployed, and GDP is expected to grow less than 1 percent in 2017, according to the International Monetary Fund. Worse, that 50 percent debt-to-GDP level does not include guarantees on shaky state-owned enterprises like utility Eskom, which could add another 10 percentage points.

Gordhan’s replacement, Malusi Gigaba, elicits more questions than answers. Will he ease off on the government’s goal of stabilising debt at 48 percent of GDP by 2020/21? Will he ramp up guarantees to companies like Eskom? Ideally not. A 355-page report released in the autumn by the South African public protector suggested that the Eskom board was improperly appointed.

The national debt could get bigger but also harder to service. South African debt yields and the cost of insuring its bonds have spiked, and the rand could have further to weaken – the currency slid over 8 percent since its low on March 27 to trade at 13.33 rand to the U.S. dollar; last year it was nearly 17.00 rand. The more it craters, the more South Africa’s inflation could test the 6 percent range at which the central bank gets anxious. Higher rates would hit the economy and debt servicing capacity even more.

Looming in the background is a junking of the country’s debt status, which now looks unavoidable. While the bulk of government debt is in rand, a third of that is owned by non-residents. State-owned companies are even more reliant on foreign currency borrowing, according to the IMF. With Gordhan around, South Africa was still in trouble; without him, it is really adrift.

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