This article was published in the Sunday Times on 1 December 2019
WE have been here before, perhaps one too many times. Looking at apprehension towards a future date on the economic calendar with much foreboding. Wondering what it just may mean for the South African economy.
A couple of months back, there was much riding on the convictions of Finance Minister, Tito Mboweni, in his medium term budget speech in addressing our fiscal challenges. Markets weren’t impressed, despite an overall welcoming of his much politically contested economic plans.
Wariness has remained over just how committed the state is towards addressing its challenges, which quite simply equates to a very long shopping list and a shrinking income stream that cannot meet the obligations. Holding the harshest judgement on the state’s attempts to sort its finances has been ratings agency Moody’s Investor Services. While the other two, Fitch Ratings and S&P, have long downgraded our ability to repay debt into “junk” status, Fitch has remained on the positive side of the investment grade line
Call them friendly to the South African story, or more considerate of the structural fault-lines in our economy, for whatever their reasoning, they’ve resisted following the path of their peers. But come next February, it seems we may have run out of rope if promises of the new political dispensation at the helm of the governing party, ANC, aren’t translated into hard decisions.
The warning signs were contained in last week’s decision by S&P to cut its outlook on our debt to negative, raising the prospect of a deeper slide into junk territory. Should that come to pass, and I am thinking that the February budget will be the deciding factor, the only deduction is that Fitch would have to follow suit.
And at the risk of remaining a real outsider, Moody’s is more than likely to drag us into full “junk” territory. It’s a certainty because at the start of November, the agency downgraded its outlook for our credit rating from “stable” to “negative.” This is the final step before dropping the country into “junk.”
There’s a lot riding on February budget and the indecision over the fate of the national airline, SAA, ahead of that date is a most worrying sign. At the centre of the country’s rather rapid fiscal decline over the past five years has been the twin factors of a slowing economy and the governance collapses at some of our largest state-owned enterprises, namely Eskom and SAA, with exploding debt levels as a result.
Global investors are watching as well as ratings agencies that taken a keen and very critical interest in our matters in what we can call agree were the “wasted” nine years.
A period that has been difficult to recover from if you consider that government’s debt-to-GDP ratio was recently as two years ago was at 50.6% and is now currently 61% and will grow to above 71% of GDP by 2022.
To ground the feuding politicians, labour unions and other stakeholders in the South African economy, including our peers within the corridors of Business Leadership South Africa, in reality, one should remember what the implications of a descent into full blown “junk” are. During the often-mad ride of the latter part of the administration of President Jacob Zuma, we were maybe more attuned to the risks posed.
A slide into full blown sub-investment grade, a more palatable term than junk, would immediately spark an expulsion of South African bonds from the Citigroup’s World Government Bond Index. The index doesn’t allow bonds that are junk.
The gloomiest prediction from this event that I’ve seen is that it would trigger more than R150-billion of outflows and send the rand crashing. One can quite correctly make a bet that the South African Reserve Bank, which has been clear in its mandate to keep a lid on inflation and therein protect the value of our rand, would react with immediate rate increases.
With an economy quite literally a chronic sufferer from low consumer and business confidence, one can imagine what a rapidly weakening currency and rising interest rates would do to the retail, banking and other services sector. Food prices that are already coming under some pressure on poor weather conditions would only rise further and the poorest of poor would see it in bread prices.
As we end this year and edge ever closer to that February date, these are the risks posed by indecision, worryingly even amongst the most sober in our governing class. It builds no confidence that there indeed is a path towards fiscal discipline, while still ensuring an environment for improved economic growth.
Now there’s another school of thought that suggests that markets have long factored in our slide to full blown junk come February and that actually South African assets may even rise in its aftermath as long as sentiment towards emerging markets remains supportive
But what will remain, if indeed this comes to pass, is that our fundamentals still would have deteriorated and no matter the market cheer that would come the final realisation of full blown “junk” status, we would have dug ourselves into a much deeper hole. The shopping list would be ever more expensive, and let’s remember that it includes the ambitious National Health Insurance plan. That may very well be forced onto the scrapheap of history.
Indecision was what many had hoped would be ushered in under this sixth administration and right now, we really need some decisiveness. To be fair, there have been some positive examples of an administration that has looked to bring more certainty into South African story, namely the timely release of the Integrated Resource Plan by the Department of Mineral Resources and Energy, the Department of Public Enterprises’ white paper on Eskom and more recently the appointment of new CEO.
There can be no let-up however, there’s a day of reckoning just around the corner.
MAVUSO is the CEO of Business Leadership of South Africa.
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