The state and business are in this fight together
IN early December, South Africa was downgraded by ratings agencies Fitch and Standard & Poor’s to the lowest rating before “junk”. Moody’s had done the same a few days earlier. Two days later, President Jacob Zuma replaced Nhlanhla Nene as finance minister with David van Rooyen. On top of the downgrade, this caused the currency to fall further.
The economy has not been performing for many years, global markets are unstable and currencies volatile. The government’s initial response after 2008 was right: increase spending to offset the slump in the world economy. But the government kept on spending. Significant pay increases for public servants followed. Where the private sector, wary of global uncertainty, wasn’t creating jobs, the government partially plugged the gap with “internal” job creation.
Normally, countries pay such increased costs from higher tax returns. But this did not materialise, as the global economy affected production levels and exports. So the government had to borrow. As a result, it is running a deficit of nearly 4%. Eskom’s inability to generate enough power spooked many international investors and forced local manufacturers to reconsider expansion.
It did not help the government’s cause that it pumped money into institutions that were not performing. SAA has received more than R30-billion over the past 20 years, and remains loss-making.
South Africa probably has until June 2016 before ratings agencies decide whether to downgrade it to junk or not. That’s enough time, if there is a will, and the right policies are fast-tracked. But some decisions might prove unpopular socially, which is tricky in an election year.
International investors by law are not allowed to invest in anything that has junk status. This law came into effect because of the speculative nature of pre-2008 global banking investments. Most investors, particularly in pension funds or hedge funds, will withdraw investment from South Africa. These investments are largely in government bonds. In 2009, the share of foreign investment in government bonds was around 14%; it is now around 40%. Foreign investors have a majority stake in almost half of the JSE’s top 40 stocks. Withdrawing this will have a severe impact on our financial markets. On top of that, the government would need to borrow more money, at an even higher interest rate. Some R11-billion — what South Africa is borrowing weekly — needs to be repaid sometime. Again, we can repay it only with profit, which requires economic growth of around 5%. South Africa is expected to grow at less than 1%.
Junk status will not make the country bankrupt or inoperable — Greece is insolvent and Russia has been downgraded to junk status. The rating is an opinion of ratings agencies. But the global perception and reputation of the country is important. Global corporates will still do business with Greece or Russia, because the market is large enough to continue making money, and the overall reputation of the two is good. But will they do the same in South Africa, which is behind other African countries in terms of competitiveness and market opportunities? How can we fix this?
Finance Minister Pravin Gordhan is well-liked by the investment community. He is trusted. He will continue to cut government expenditure and look to make tough, perhaps unpopular, decisions. But this is not just the responsibility of the government. The private sector will be affected by a downgrade. Gordhan knows that the private sector trusts him, and will call many meetings with business leaders to build a united front.
Business will survive, but people, particularly the poor, will have to face the consequence of rising prices, and they have no ability to be part of the solution.
As responsible corporate citizens, this duty falls to business. It’s time to repay that social licence to operate, by joining hands with the government to avoid a further downgrade at all cost.