SA has to act as ratings risk is here to stay
Reform momentum must be kept up
WITH the international spotlight on South Africa as S&P Global Ratings made pronouncements on sovereign ratings on Friday, it’s critical that the work being done on the structural reform of the economy to promote faster and more inclusive growth continues without interruption or distraction. Weak economic growth worsens the country’s greatest challenges — poverty, unemployment and inequality.
Despite the good news this week that S&P has not downgraded South Africa for now, the risk remains considerable that at least one of the rating agencies will downgrade the sovereign rating to below investment grade by the end of 2016.
There’s no doubt a sub-investment grade rating would further weaken the rand, a barometer of confidence, and put upward pressure on inflation and interest rates, which would affect all South Africans negatively, but particularly the poor. A sub-investment grade environment increases the cost of investment in our economy, and as such reduces growth even further.
Despite these fears and the overall negative outlook, there have been some recent positive developments.
The start of real dialogue and collaboration between business, government, labour and civil society is cause for optimism, while the strength, independence and integrity displayed by key institutions such as the Treasury, the Reserve Bank and the courts are reassuring.
Sustained inflows into the bond market this year and the success of an international bond issued by the Treasury may be signs foreign investors are less negatively oriented towards South Africa in the context of global emerging markets than we sometimes believe. That said, the outflows from the South African equity markets reflect real concerns on the earnings potential of South Africabased companies and an increasing cost of equity, given the overall slowing economic growth and rising long bond rates.
Progress has also been made with the eight-point plan for averting a sovereign downgrade that was shared with the government in February and endorsed by Finance Minister Pravin Gordhan and President Jacob Zuma. In addition, several work streams were set up to intensify efforts to strengthen the economy and help effect inclusive economic growth.
An exciting development has been the proposed R10-billion fund (with an initial commitment of R1.5-billion by corporate South Africa) to stimulate small- to medium-sized enterprise development and build capacity to create more entrepreneurs. A significant element of the fund would be the establishment of a large-scale mentorship and technical assistance programme. It is anticipated the government would also contribute to the fund, expected to be set up very soon.
The governance and management of state-owned enterprises and the reliability of our electricity supply are important criteria for rating agencies, so Eskom’s improved operations have been welcome, as has the commitment by government to reform SOEs.
Fiscal consolidation, an important criterion for the rating agencies, has been convincingly outlined in the 2016 budget, but this needs to be accelerated further to build market confidence and stabilise fiscal debt as a percentage of GDP.
Although no doubt structural issues exist, cyclical noise has also been a factor in South Africa’s poor past economic performance. Growth in GDP per capita, a key indicator of changes in the average welfare of the broad population, has been below 1% for the past four years, but new data suggest this has been the case for only the past two years, which means an economic turnaround may be easier to effect than previously thought.
To make this turnaround happen, the nation’s key stakeholders need to focus on two key priorities. First, it is vital to channel the current sense of crisis into keeping up the momentum on collective efforts to boost the economy.
Despite the overall negative outlook, there have been some positive developments
This may entail considerable sacrifice and concessions on all sides, but the long-term benefits will outweigh the short-term pain. We need to remember we are constantly competing with other emerging markets.
The second priority is supporting leadership that is accountable and ethical. Following proper and ethical processes needs to be a priority for government, business, labour and civil society. Without adhering to crucial democratic principles and the rule of law, a successful future for all in South Africa will be hard to achieve.
It is important to remind ourselves that the South African economy is fundamentally market-based: the role of the private sector is to drive the economy forward, creating jobs and generating tax revenue, while the government’s fundamental role is to provide an enabling environment in which the private sector can operate efficiently and competitively and also to deliver vital services to the broader population in the social sphere. Together we have the responsibility to safeguard the future and create greater wellbeing for all.
Another significant impediment to growth that must be overcome is the fact that we are a nation with inadequate savings. Our total national savings fall far short of the financing required for investment in physical and social infrastructure. This shortfall currently equals about 4% of GDP, or more than R150-billion a year, compelling us to rely heavily on foreign savings, or capital inflows, making us more vulnerable to the vagaries of sovereign ratings.
This is not just about appeasing rating agencies. It is about changing the landscape of our economy to create a platform that fosters inclusive growth and building a better society for all South Africans.