Focus on details of growth not on ratings
SA policymakers are gripped by paralysis while they wait to see whether we will successfully avert a credit rating downgrade from Moody’s Investors Service, the last ratings agency to keep the country on investment grade, despite having recently revised its outlook to negative.
It is a truism that a credit downgrade would have material negative implications for the domestic economy. Our debt servicing costs have already been growing at an average pace of 13% per annum. The third-quarter GDP numbers, coming in at a contraction of 0.6%, will anchor the ratings agencies’ views that SA is struggling to use the tools available to it to galvanise growth sustainably.
Construction went into its sixth consecutive quarter of negative growth, while transport experienced a contraction of 5.3%, the largest quarter-on-quarter contraction since 1993.
Broadly, this suggests that irrespective of what the agencies choose to do, structurally the economy remains constrained from growing sustainably because, economically, the centre is failing to hold.
But what if the policymakers were to build a base case focusing not on what the ratings agency may or may not do but rather on what will be needed to get the economy on to a sustainable growth path.
Research broadly shows that credit ratings agencies have largely been procyclical and are stricter during economic downturns than during booms. This means there is little to get surprised about with respect to the ratings trajectory we have seen in the SA economy over the past five years. In many ways it may suggest it is not unreasonable to price in an ultimate ratings downgrade from Moody’s.
In his 2013 paper “Procyclical Credit Rating Policy”, economist Jun Kyung Auh found that this procyclicality results in an increase by as much as 11% in credit spreads during economic downturns partly explaining the pace at which debt servicing costs have risen over the same five years. Simply, this means that while the credit agencies still closely analyse the local economy before reaching a credit rating decision, there is an inbuilt bias for them to be harsher in their scrutiny.
The economic growth policy strategy paper recently presented by finance minister Tito Mboweni was certainly a start towards taking a proactive policy stance, but unfortunately fell short on detail on the real microeconomic tools needed to galvanise that level of growth.
As such, much of the policy efforts have targeted attracting investments on a macro economy level, without materially articulating which investments we actually want and how they could materially shift the export competitiveness, skills profile and aggregate output in the medium to long term.
The proposed proactive policy framework ought to carve out target sectors we want to sustainably exploit, to ensure we compete well and are market leaders in the global economy, while leveraging those to detail our education strategy and skills planning.
To illustrate, SA is the second-largest citrus exporter globally behind Spain, yet our economic strategy does not detail the type and level of investment we need to help us become the largest citrus exporter.
The same policy strategy does not sufficiently detail how we can leverage this comparative advantage to become the global leader of knowledge production in the sector. Simply put, our skills planning and investment in education does not deliberately align to the ambition of becoming the world’s largest exporter of citrus.
I use citrus mainly as an illustrative tool to show the level of detail our microeconomic plan needs to have, to ensure the economy is positioned for growth in the medium to long term and we are able to be deliberate about the type of investment we want to attract.
RESEARCH BROADLY SHOWS THAT CREDIT RATINGS AGENCIES ARE STRICTER DURING ECONOMIC DOWNTURNS
● Skenjana (@sifiso_skenjana) is founder and financial economist at AFRA Consultants.
He is completing a PhD in finance for development.