Ratings downgrade has to be taken very, very seriously

South Africa’s lack of appeal to investors is no laughing matter, especially to the poor, writes Sango Ntsaluba

AS newly appointed Finance Minister Malusi Gigaba jets off to the US to woo investors and appease the rating agencies, one thing is certain — South Africa is in an undesirable situation in the context of global markets.

Despite its racial and economic divide, South Africa had managed to show that an African country could be economically stable and have the ingredients to move to developednation status.

It was one of the few African countries with a solid base, which helped it to consistently remain at investment grade — until last month and the downgrade by two ratings agencies to junk.

What will be the impact of the downgrade for the economy, investors and the ordinary person?

There has been much noise from some quarters, dismissing the downgrades as nothing other than collusion by market forces bent on maintaining the economic status quo.

But the voices of reason have tried to amplify the real consequences of this unfortunate occurrence.

South Africa joins a list of other Brics countries to be downgraded, and a number of African and emerging countries with junk status.

Brics partner Brazil, for instance, is — like South Africa — at a crossroads following a number of suicidal political decisions leading to popular protests and political uncertainty.

In South Africa the issues have been around state capture and “Nkandlagate”; Brazil has been preoccupied with the Petrobras scandal.

Brazil was downgraded to junk status in 2015, resulting in a sharp increase in the cost of capital and borrowing, a reduction in foreign investment and an increase in unemployment from 4% to above 8%.

The downgrade of Russia’s sovereign debt to “junk” in January 2015 resulted in the dampening of investor confidence.

While the ills that befell these countries cannot all be attributed to the downgrades, the coincidence is too glaring to ignore.

A question lingers, though: are rating downgrades conspiracy or fact?

The 2007-08 global financial crisis brought rating agencies under the spotlight as analysts and standardsetting organisations such as the Basel Committee expressed reservations about their methodologies. Some directly attributed the subprime crisis to their inadequacies.

The rating agencies reacted to the criticism by enhancing their assessment methodologies. To this end, they have had to make some brave decisions. Even the mighty US has not escaped their wrath.

Among the countries that have been subject to downgrades by S&P Global Ratings are Brazil, China, Russia, the US, Argentina, France, Greece, Italy and the UK.

Whether the downgrades of these big economies should be viewed as signs of reform and courage or as a smokescreen remains to be seen.

What is clear, though, is that South Africa’s downgrade is nothing peculiar in the credit market. Nor is it a conspiracy against the government or the ANC. The sooner we get to grips with this truth, the better.

However you look at it, the position our country finds itself in is that of an undesirable state.

Like an uncut diamond, South Africa has its share of rough edges. Some of the glaring structural challenges affecting the country include high poverty levels, widening inequality, high levels of unemployment, and an ongoing education crisis.

Post-apartheid, the divide between the rich and the poor escalates by the day and is ranked among the worst in the world.

The ANC government has responded to some of these challenges with a gamut of initiatives including social grants, black economic empowerment measures, and willing buyer, willing seller land reform.

Some of the policies have failed dismally while some are just shortterm solutions that need to be buttressed by structural reform on land, education and inclusive growth.

While the government has of late been humming the hymn on radical economic transformation, the policy is devoid of substance.

These challenges have manifested in an increasing fiscal burden and a widening current-account deficit, as the government grapples with competing needs.

Against the background of a low growth rate over the past three years, the downgrade elevates the possibility of recession and a larger fiscal deficit.

Against a backdrop of underperforming tax revenue, the government has had to rely on the debt market to raise financing. It may well be argued that, at least in the short to medium term, South Africa cannot finance its budget commitments out of its revenue collections.

Increasing debt can become a yoke on future generations if the funds are channelled towards recurrent expenditure.

No one holds a crystal ball to see how the country will fare following the downgrade. One thing is for sure, though: the future is less certain than it was a year ago.

It is incomprehensible that some see a funny side to the downgrade. The downgrade is no joke and we cannot be amused unless we seek to display ignorance or we are showing the communities who are still waiting for a “better life” a middle finger.

Ntsaluba, founder of NMT Capital and Sizwe Ntsaluba Gobodo, writes in his personal capacity

However you look at it, the position our country finds itself in is that of an undesirable state