Is downgrade inevitable for a cake addict?
As the country eagerly waits to see if the weeklong strike at SAA will achieve what the finance minister failed to do, and as ministers scramble to settle on a resolution, another deadline is fast approaching for Tito Mboweni. And optimism seems to be in short supply.
For the past year or so it seemed everyone, journalists included, has treated every approaching budget policy statement from the minister as the magic bullet that will finally sort out everything. The obvious gap between what the minister desires and what can be delivered, given the political constraints, has been conveniently forgotten.
Having taken over shortly before the 2018 medium-term budget policy statement, the minister was given somewhat of a pass then. Similarly with the budget in February 2019. Though there was some criticism of the lack of anything resembling a plan to arrest a deterioration in the economy and government finances, there was at least a sense of relief at his realism and clarity on what needed to be done to turn the ship around.
Of course by the time of the October medium-term budget policy statement, little progress had been achieved and the markets were treated to some horrifying fiscal numbers, enough to prompt Moody’s Investors Service to warn that it was running out of patience.
Moody’s, the only ratings agency that has SA on investment grade, warned that it needed to see some credible action in February’s budget. So the cycle started again. Another deadline. Is a downgrade inevitable and if it finally comes to pass, will it mean anything?
The economy is in the midst of a “deepening crisis”, Reserve Bank deputy governor Kuben Naidoo acknowledged at a function last week.
On the potential impact of a Moody’s downgrade, he was noncommittal.
While anything between $5bn (R73bn) and $8bn of government bonds could be at risk of being offloaded in the event of them falling out of key bond indices that international investors track, the exact impact would depend on other factors. For example, it might be that a downgrade coincides with a risk-on period in which emerging markets are flooded by money searching for yield. The rand gaining within this context would not necessarily be validation for those who think ratings don’t matter.
History would suggest that we look beyond the next two months as there’s little reason to think some miracle cure will emerge. As we head towards the holiday season, it’s hard to see progress on any of the big issues. So that leaves January and about half of February.
At the same function, Bank governor Lesetja Kganyago made the point that SA’s recent history is littered with plans to fix constraints to economic growth. A mistake that is often made, he argued, is the description of these initiatives as having failed. How can they have failed, he asked, if they were not implemented in the first place?
“We could ask ourselves, ‘if we implemented them, what would have happened?’ Then we could have a big discussion about that.”
That probably explains much of the gloom about the economic outlook.
Presidents and finance ministers who were in stronger positions politically compared with the current holders of the offices have consistently found themselves unable to push through reforms. And the result now is that SA has a 1% economy, instead of the 4% one it had in the period leading up to the outbreak of the global financial crisis a decade ago.
The problem with SA is that we haven’t been good at recognising the need for tradeoffs. To quote UK Prime Minister Boris Johnson in the run-up to that country’s Brexit vote in 2016, our policy towards cake is also to have it and eat it. Johnson and his Brexit disciples were convinced that the UK could get rid of all the bad things it didn’t like about the EU, while holding on to the benefits.
SA’s approach to its fiscal situation is similar. We seem to be in agreement about what needs to be done but unwilling to take the short-term pain that will have to come with it.
Listening to Kganyago and other monetary policy committee members last week, it was clear that this was a key consideration in their decision to keep interest rates unchanged at their November meeting, with the country “risk premium” a vital part of the discussion. This is primarily linked to the worsening fiscal position, and there isn’t a sense of an improvement soon. As Kganyago pointed out, the country’s 10-year bonds tell part of the story.
The big inflation story of 2019 has been the consistent undershoot that has left the rate at the lowest since 2011 and led to questions about the robustness of the Bank’s modelling. Typically, lower inflation should be accompanied by a drop in bond yields as investors bet on looser monetary policy. The opposite is happening here. Ten-year yields are about 60 basis points, or 0.6 percentage point, higher than in July.
That segment of the investment community is demanding that premium because they are not counting on any quick policy wins in the next months.
Perhaps we can prove them wrong. SA’s politics mean that would be a brave bet.