SA needs urgently to lift itself out of its junk malaise
THE recent downgrades of South Africa’s sovereign credit rating by major ratings agencies, and the prospect of further such shocks, come in a constrained fiscal environment that allow the government precious little room to adjust to the challenges of our sub-investment status.
Some of the effects of the downgrade will be immediate, others slower, but they will be far reaching and challenging. It is therefore in our national and southern African regional interest to immediately map a path back from junk status.
The most proximate causes of the downgrade lie in governance issues but the background was the slowing down of gross domestic product growth to below zero. With policy uncertainty, political infighting and weak employment creation, these combined to put pressure on the fiscus.
The initial impact of the downgrade is almost automatic. It will see South Africa removed from several JP Morgan indexes and trigger certain funds to immediately disinvest from government bonds.
Fundamentally, a credit downgrade reflects a loss of confidence in the future of the country. For the person on the street, the downgrade will lead to interest rates on credit-card debt and loans rising. Cost-ofliving expenses will go up and income taxes will rise, as the government tries to raise money from citizens. There will be less spending on social projects and enterprise development.
Compounding the problem, businesses find it harder to find finance, and job-creation shrinks further. A common strategy to recover from the downgrade would be fiscal consolidation or austerity, in other words less government spending. That’s a tough one for our government, because many of its budget outlays are aligned to political priorities.
We can look at debt restructuring in consultation with our debtors. Privatisation would traditionally be an option, but given the governance issues around SA Airways and Eskom, these companies would not fetch attractive prices.
A strategy to resurrect the country’s status as an investment-grade capital destination thus calls for political and economic reform, not simply a new budget. Since perceived instability is what led to the downgrade, the ultimate goal must be political stability, with a pragmatic centre. Being pragmatic might mean dropping the “radical” in radical economic transformation, as appears to already be the case in recent finance ministry communications.
That’s important, because the responses to economic policy come not only from Pretoria or Johannesburg. They come from New York, Frankfurt and similar places. These investors avoid destinations where their assets may be nationalised. The next step out of the junk status gloom is macro-economic stability. This starts with a development plan. We have the National Development Plan, but we need the political will to drive implementation. If these steps are taken, we will see the return of the magic-economic ingredient – confidence. This will encourage the private sector to start investing the estimated R600 billion in funds it is sitting on.
Ten years ago, private investment in the economy was 28 percent. Now it’s down to 20 percent. When we reverse this trend and get the private sector investing, it develops its own momentum. Investment creates greater confidence, which generates more investment.
In the absence of a strong state, we need an initiative between civil society, labour and business to decide where we want the country to go. State resources must be drawn into that agenda instead of waiting for it to happen the other way around.
This heralds a shift in the South Africa paradigm, where we have traditionally put the state at the centre of our considerations.
Many of us fought for state power but today we can’t wait for the state to get its act together. We’ve got to get our own act together, we need to clarify our national vision and to pressure the state to help us bring it to fruition.