Down but Not Out
AFTER the two rating agencies downgrading South Africa, the question now is how this downgrade is likely to impact the economy. This matters as South Africa is one of Africa’s largest economies, accounting for one fifth of Sub-saharan Africa’s GDP. In addition, more than one fifth of Africa’s total FDI stock is in South Africa. South Africa is China’s largest trading partner, as well as the largest market for goods in Africa, purchasing 15 percent of all of China’s exports to the continent in 2016.
Downgrade influence The downgrade decision followed the cabinet reshuffle on March 31 by South African President Jacob Zuma changes were made to 10 of the country’s 35 ministries, including energy, police and tourism; five ministers lost their jobs while five others have been given new portfolios. The canary in the coal mine was the removal of Finance Minister Pravin Gordhan, replaced by Malusi Gigaba. Gordhan was viewed as a safe pair of hands and a spearhead for implementing the necessary economic policy to unlock South Africa’s structural constraints to growth.
At the very least, the downgrade suggests that S&P, for instance, believes that the likelihood of progress in dealing with a checklist of items including the finalization of labor and mining reforms, the adoption of more aggressive fiscal consolidation measures expected to stabilize government debt faster, and maintaining broad political institutional stability and macroeconomic policy continuity, amongst others, has been reduced.
At a maximum, the downgrade boldly assumes that the cabinet reshuffle will not be reversed and that the new treasury appointees will allow fiscal slippage, especially with respect to providing increased support for state-owned enterprises in general and Eskom in particular, without any improvement in their governance. It also assumes that fiscal policy will be increasingly negative for growth.
To be fair, the downgrade itself has been coming for some time. Indeed, by S&P’S methodology, South Africa’s economy was already in noninvestment grade in 2016, based on growth and growth projections alone. Investment grade requires per-capita GDP growth of 1 percent - which means with South African population growth of 1.6 percent, growth must be 2.6 percent. Instead South Africa has seen growth slip to an average of just 1.7 percent annually in the past three years and an utterly paltry 0.12 percent last year. That is materially lower than the 10-year average trend growth through 2013 of 3.5 percent. Worryingly, the years prior to the 2008