Downgrades are a warning
Just like banks, ratings agencies make judgments on borrowers’ ability to pay the interest on their loans and ultimately repay these. That’s all they really do when they rate countries (sovereigns) such as SA, but since the ratings fundamentally affect the price and availability of those loans, what the ratings agencies say is a powerful discipline on the countries they rate.
On Friday night, S&P Global Ratings exercised that discipline, telling SA, in effect, that it had fallen way behind the emergingmarkets class when it came to economic growth and that there was no way it could fix its rapidly deteriorating public finances without risking further damage to growth.
S&P’s verdict took its rating on domestic rand-denominated bonds to junk status, after it did the same to the hard-currency bonds in April. It comes after Fitch junked both ratings in April, after Pravin Gordhan was ousted as finance minister.
Moody’s has been kinder to SA, giving it the benefit of the doubt even as growth has fallen short of the agencies’ low expectations, while public debt projections have risen steeply. But even Moody’s has put SA on notice, giving it until after the February budget, at the very latest, to deliver on its promises to get fiscal consolidation back on track. “A downgrade would likely result were the rating agency to conclude that measures to address funding gaps over the next two years lacked credibility,” said the agency sternly, “or that the lack of progress with structural reforms effort would result in an environment not conducive to investment or growth”.
SA has been warned. And the comments in S&P’s ratings report are particularly scathing. SA has a growth problem, which is the underlying cause of its fiscal problem, says the agency, which argues that there has been far too much emphasis on redistribution at the expense of growth and that unless there are structural reforms, particularly labour-market reforms, the economy may remain blocked.
Many in the market had expected the ratings agencies to wait to see the outcome of the ANC’s December elective conference before they made their decisions. As S&P sees it, though, whoever wins will have the same problem.
It’s surely not the case that December’s outcome will make no difference to SA’s growth and fiscal prospects: a Cyril Ramaphosa win would clearly boost investor confidence significantly and would affect economic outcomes, at least in the short term.
But who can blame S&P for junking the rating nonetheless? Indeed, it’s a testament to the efforts of Gordhan and the business and union leaders who worked with him that they staved off the downgrades to junk status as long as they did, in an economy that was so clearly failing.
The clear message from all three ratings agencies is that SA cannot fix the public-finance problems that are making it ever less creditworthy without tackling the problems that prevent the economy from growing.
The political agenda, says S&P, has overshadowed policy making, despite the deteriorating economy and weakening public finances. And the bottom line from all three is that unless the government finds time to take a break from state capture and the political infighting in the governing party so that it can take policy seriously and start doing something about economic growth, SA is bound to slide further down the junk ladder.
Finance Minister Malusi Gigaba and his advisers and cabinet colleagues seem to have realised too late that the medium-term budget was a disaster. Now they are making belated commitments to put measures in place to stabilise the public debt and get back on the path of fiscal consolidation, as well as curb President Jacob Zuma’s free-fee incursions into the fiscal framework. It should not have needed the discipline of the ratings agencies to prompt these promises. We can only hope that December’s political outcomes are such as to mitigate some of the damage.
WHAT THE AGENCIES SAY IS A POWERFUL DISCIPLINE ON THE COUNTRIES THEY RATE