Ratings agencies alarmist and subjective
Borrowing is a costly exercise for individuals, households and sovereigns alike. For the last, when one considers what some have called the “Moyane effect” on tax receipts, a volatile rand and weak growth, every rand borrowed has not only an economic growth impact but political dimensions as well.
The recommendations, views and advice provided by ratings agencies Fitch, S&P Global Ratings and Moody’s— or as political economist Patrick Bond calls them, the “three brothers of Manhattan often focused on the ability of borrowers to repay loans, come to mind.
Those in support of their role in global capital markets suggest that the most important role for these agencies is overcoming market failures and information asymmetries among lenders, investors and issuers of debt.
So it can be accepted in sovereign contexts that this role interfaces uncomfortably with public policy decisions. The quanta and terms of borrowing influence whether mud schools are replaced with prefabs and welfare grants are paid or not. However, the ratings agencies seldom accept this fact.
“We look at the outcomes,” S&P sovereign ratings director Ravi Bhatia quipped last week, “the growth numbers and the fiscal metrics, and our rating is decided on that.”
The suggestion that the ratings decisions are technical and absent of any subjective assessment is misleading for numerous reasons.
First, it is often offered with a tinge of subjective policy analysis, as Bhatia suggested when he felt that “in SA there tends to be a focus on redistribution rather than headline growth”.
To S&P and the other “brothers”, redistribution is anathema to the growth project.
Second, the ratings outlook is often accompanied by implicit (often unstated) assumptions about what is needed to spur economic activity and growth. These views are informed by the dominant market views on how the economy functions, and are far from universally accepted rules.
Take their divergent view with that presented in the medium-term budget policy statement that the departure from fiscal consolidation is a “major risk”. This view, emerging from Robert Barro and, even earlier, David Ricardo (and the notion of “Ricardian equivalence”) suggests that financing budget deficits through greater use of debt, as the medium-term budget policy statement suggested, does not lead to rises in aggregate demand because economic actors anticipate future tax rises needed to service and pay for the debt.
There are many critiques of this view but they are beyond the scope of this discussion. Safe to say, it is nothing short of dangerous to assume that these ideas enjoy unopposed acceptance as the “rules” that govern economic behaviour. To suggest they do is undemocratic and serves to undermine the political and policy functionaries directly and indirectly appointed to oversee public finances.
The other dimension of the alarmist discourse relates to what they see as nonmarket mechanisms to resolve widescale landlessness and inequality. Bhatia suggests that willing buyer, willing seller is fine. That is just normal market forces at work, and the current plan is quite different from that.
Such a view would be unsurprising from people who are new to the political economy of SA, but coming from organisations that rely on evidence to help market actors make borrowing and lending decisions, it is nothing short of scandalous. The spectacular failure of the willing buyer, willing seller programme in SA, Zimbabwe and Namibia is a contextual characteristic of the land debate that S&P conveniently overlooks in its market obsession.
That different parties on either side of the economic, political, social and ideological spectrum have engaged in nationwide dialogue on this matter should expose the alarmist narrative peddled by those who feel they know the solutions to our problems better than us. Unfortunately, that is often the cost of borrowing more than a 10th of your borrowing requirements from pipers who rely on alarmist messengers to deliver the rhythm of their tune to nations such as ours.