SA'S FINANCIAL RATINGS CONUNDRUM
IN THE aftermath of their Economic Recovery Plan and Medium-Term Budget Policy Statement, November turned out to be the mensis horribilis for President Ramaphosa and his economic team, led by finance minister Tito Mboweni.
As if the impact of the Covid-19 pandemic wasn't enough, Pretoria got clobbered by global rating agencies and international investors for its handling of the economy, whose fundamentals are mired in a deeper-than-anticipated recession, with GDP growth projected to contract by minus 8.2% this year.
The Big 3 agencies, Fitch, Moody's and S&P, downgraded South Africa's long-term foreign and local currency debt ratings to ‘BB-' from ‘BB', Ba2' from ‘Ba1', and ‘BB-', further entrenching government bonds as below investment grade, in investor parlance ‘junk bonds' – a magnet to speculators because of their higher yields.
The only divergence is Fitch and Moody's maintain a negative outlook for the South African economy compared to S&P's positive outlook.
They agree their ratings reflect high and rising government debt exacerbated by economic shock triggered by the pandemic, the low trend of GDP growth and exceptionally high inequality and social obstacles to reforms, which will continue to complicate fiscal consolidation efforts.
S&P's observation that “there are indications that the economy is beginning to rebound in Q3” sounds like a crumb of comfort.
The reality, says Moody's, is “South Africa's capacity to mitigate the shock over the medium term is lower than that of many sovereigns given significant fiscal, economic and social constraints and rising borrowing costs”.
South Africa has a low revenue base relative to its GDP, which is reflected in its high debt service to revenue ratio.
This niggling doubt over Pretoria's ability to pay back its debt over the medium-term and to adopt policies that generate economic growth, employment and wealth is driving rating rationale.
Mboweni's response to the downgrade is surreal. He effectively agrees with his critics!
“Fitch and Moody's decisions to downgrade the country further,” he admitted, “is a painful one. The downgrade will have immediate implications for our borrowing costs, and there is an urgent need for government and its social partners to co-operate to ensure we implement structural economic reforms to avoid further harm to our sovereign rating.”
There is a sense of déjà vu because we have been here several times before. Pretoria's economic management is heavy on aspiration but light on reforms and delivery.
It's caught in a conundrum of balancing the competing interests of righting the historic wrongs of apartheid, empowering the majority and marginalised, and loyalty to ANC cadres, while at the same time pushing a reform agenda to improve the standard of living and to attract forign dirct investment.
Some 26 years after democracy, the ANC government seems still to be in “liberation mode”.
Real reforms can only be gained through freeing the economy from the shackles of ideologically driven and heavily interventionist central planning and embracing a smart partnership which includes the state, the private sector and society.
Laissez faire market economics is anathema, for it will merely exacerbate the already huge inequality gap in society.
So are rating agencies overrated, or even necessary?
There are many sovereigns which have successfully issued local currency bonds/sukuk that are unrated and below investment grade, especially in Africa.
Several West African countries, including Nigeria and Senegal, have issued such papers to fund infrastructure and to promote financial inclusion.
Team Ramaphosa's challenge is to transform its rhetoric of fast-tracking reforms to actual implementation. Negative sentiments, whether associated with government inertia or rating downgrades, are both costly for South Africans!