Fiscal discipline, cutting ballooning debt vital to save SA

Chief Executive Initiative reaction following the ratings decisions

SOUTH Africa’s already fragile economic growth prospects and high levels of unemployment have been dealt another significant blow following Standard & Poor’s downgrade of the country’s government debt denominated in local currency to sub-investment grade, and debt denominated in foreign currency to BB from BB+.

Two of the three major ratings agencies now have South Africa’s foreign and local currency government debt classified as so-called “junk” with only Moody’s retaining its local currency rating at the lowest level of investment grade, and placing the country’s credit on review for a downgrade. This makes it more expensive for our government to borrow money, and it increases the amount of the government budget that will be spent on interest. Importantly: it reduces the money available for housing, education, healthcare and social grants.

While this downgrade does not cause South Africa’s government debt to be excluded from the World Government Bond Index, it will likely lead to capital outflows at a time when our country needs it most. It is especially of concern as the local currency downgrade affects about 90% of the government’s debt, of which an estimated 40% is currently held by foreigners who have invested here.

This downgrade is a response to the mismanagement of government finances as evidenced in the sharply rising trajectory of the levels of government debt and fiscal deficits highlighted in the October mini-Budget. Unfortunately, this action – combined with the downgrades already suffered earlier this year and a low-growth economic environment – will put more strain on already low levels of business and consumer confidence, and mean that the welfare of millions of ordinary South Africans is yet again significantly disadvantaged.

Jabu Mabuza, convener of the CEO Initiative, commented: “All the negative ratings actions suffered so far could and should have been avoided, had the required structural reforms necessary to underpin sustained and inclusive economic growth been implemented in the interests of all South Africans. The CEO Initiative has spent much time over the past few months working with the government and labour in developing a plan on what was required to avoid these downgrades, but little has been implemented and – if anything – we saw political and policy uncertainty increase.

“It is disappointing that key sectors for economic growth and employment continue to operate amid uncertain industry policy. There are still too many regulatory impediments that hinder investment. The challenges regarding the proposed Mining Charter is an example of legislative uncertainly that has been negative for confidence, growth and jobs at a time exactly the opposite was needed.

“The situation at some of the biggest state-owned enterprises has deteriorated. New leadership has been appointed in some cases, but key entities such as Eskom – which has an unsustainable capital structure and reliance on government guarantees – still pose a material risk to the country’s financial position. This is of huge concern to any investor.”

We have always maintained that a commitment to fiscal discipline is of the utmost importance if we are to protect the economy from outside shocks and retain an investment grade credit rating. Of great concern is the evidence we have seen in the MTBPS of fiscal slippage and forecasts to increase government borrowings even further towards an unaffordable 60% of GDP, at a particularly sensitive time for the economy without any plans for remedial actions on costs or revenues.

This, combined with ongoing reports of corruption, wastage and self-enrichment at government departments and state-owned enterprises, point to the fact that too many of those entrusted with state resources do not appear to have the best interest of the citizens of this country at the top of their agenda.

The CEO Initiative remains firmly committed to improving South Africa’s credit rating. This is not an end in itself, but an outcome of structural reforms that will restore our country to faster, more sustainable and more inclusive economic growth for the benefit of all.

Over the past two years, government, labour and business have made progress on various initiatives to support economic growth. This includes the establishment of a R1.4 billion SME Fund to invest in the small and medium-sized enterprise sector; a Youth Employment Scheme aimed at providing employment opportunities to 1 million young people, as well as various investment initiatives under way in agriculture, tourism, manufacturing and healthcare.

This downgrade should serve as an urgent call to further action. The country needs to respond appropriately to this ratings action, to improve citizens’ lives and inspire confidence in the country’s future.

It will require ethical and inspirational leadership by business, government and labour that puts the interests of South Africa ahead of personal or factional interests.

Now is the time for leadership to stop procrastinating and start doing. We must work together to regain our investment grade ratings as a foundation for growing our economy and reducing unemployment. It is vital that the February 2018 Budget contains strong measures on cost containment and structural reforms to boost growth and revenue collection to arrest the unsustainable increase in government debt and fiscal deficit increases.

True, sustainable economic empowerment and transformation will only be achieved through structural reforms that drive inclusive growth. Populist policies that focus on short-term solutions with no regard for the liabilities we bestow on future generations will only result in the economy slipping further from providing opportunities that benefit all.