Downgrade blocks what we need to see

DISCUSSIONS on averting a ratings downgrade are misguided. Aversion should have started in 2012, when South Africa was downgraded by S&P Global Ratings for the first time since 1994.

Focusing on averting is myopic. Our focus should be on sustainable long-term inclusive growth.

There is a high probability of a ratings downgrade on Friday by S&P, whose foreign currency debt rating sits at BBB- with a negative outlook.

Fitch has assigned the same rating to South Africa, but the difference is Fitch’s outlook is stable. There is therefore an expectation that Fitch could adjust its outlook to negative but maintain its BBB- rating.

If S&P doesn’t downgrade South Africa on Friday, it will probably do so in December. By then, the ratings agencies will have a better view of our economic performance and clarity on our fiscal position after the medium-term budget policy statement, which is released in October, and they would have observed the events leading to and the results of the local government elections.

Whether or not we are downgraded, we need to reform the economy.

There are lessons to be learnt from our emergingmarket peers.

Colombia lost its investment-grade status during the 1999 economic crisis and regained it only after 12 years, thanks to president Alvaro Uribe’s implementation of wide economic reforms. Foreign direct investment increased by 400% between 2002 and 2009, the period in which Uribe served his two terms. When S&P finally upgraded Colombia, it cited a favourable growth outlook and resilient economy.

South Korea was upgraded by S&P 12 months after it was downgraded in 1997. The 1997 Asian crisis knocked the country’s economy, resulting in a bail-out package of $58.35-billion from the IMF. Before the ripple effects of the Asian crisis took a toll on it, South Korea’s major companies defaulted on their loans, prompting international credit agencies to downgrade the ratings of banks with heavy exposure to those companies.

According to S&P, the downgrade was due to the escalating cost to the government of supporting the country’s ailing corporate and financial sectors.

The downgrade precipitated a sharp sell-off of the Korean won. In an attempt to protect the currency, the central bank raised the short-term interest rate to over 12%, more than double the inflation rate.

South Korea adopted aggressive fiscal reforms and stabilised its currency. It increased its foreign currency reserves to about $50-billion from about $18-billion at the height of the crisis in December 1997.

It has never returned to sub-investment grade and is currently rated AA- by S&P.

We must reflect on the things we did not do

The characteristics of these countries and their political systems are different, but what is common to both cases is that economic reforms precipitated an upgrade.

Should S&P downgrade South Africa’s sovereign rating, it will be up to us to decide whether we recover over 12 months or 12 years.

And by us, I mean every South African citizen. It is not just South Africa’s fiscal position that will be scrutinised; GDP growth and the political climate are assessed as well. If S&P believes the political climate is undermining the policy adoption required to stimulate growth, it will downgrade us.

Whatever the outcome on Friday, we must reflect on the things we did not do.

Leoka is an economist at Argon Asset Management