A few months ago I wrote at length on this page about the need for South Africans to consider the possibility of a ratings downgrade with the seriousness and direness it deserved.
At the time I noted that the possibility of a downgrade was no laughing matter, nor would it, if it happened, be the result of a conspiracy by market forces bent on destabilising an economy.
What prompted my warning was the prevalent level of complacency and what seemed like misinformation in relation to the effects of such a downgrade on the country and population.
This followed two consecutive downgrades by Standard & Poors (S&P) as well as Fitch, leaving South Africa’s economy on sub-investment grade. With no clear fiscal consolidation efforts and policy certainty it was evident that South Africa was staring a further downgrade – one to junk status – in the face.
As things stand, we are beyond discussions about the credit ratings agency trinity of solicitude. We are beyond the luxury of pontification.
Seven months down the line, we have arrived at the edge of the cliff. The chickens have indeed come home to roost and their impact will be felt for some time to come.
Already indications are that more job losses are on the cards, the prices of basic food stuffs and fuel will escalate, leaving mostly the poor to their own devices. It’s also important to note that sovereign downgrades will invariably lead to downgrades of private sector businesses through no fault of their own.
There are generally three factors that cause a country’s credit worthiness to be downgraded:
First, is what in Latin is termed a force majeure, meaning a superior force or unavoidable accident that will destabilise the markets.
Second, a downgrade could be prompted by a disaster or crisis, such as North Korea attacking the US, which will also result in the destabilisation of the markets.
Last, man-made actions.
Angus Duff and Sandra Eining in a 2014 paper on Debt Issuers remind us of one of the fundamental reasons for a credit rating: A satisfactory credit rating from a reputable credit rating agency is required to enable the (corporate) borrower to raise debt finance at an economic rate via the capital markets.
In 2016 government debt to GDP stood at 51.70 – its highest since 2006. The National Treasury’s Debt Management Report for the year ending March 2016 shows government debt service costs to be R128.8-billion or 3.2% of GDP.
This was before the downgrade to the low level we are now at.
Without casting aspersions or pointing fingers, but simply by following the sequence of events that got us to where we are as well as by looking at the reasons given by S&P for the downgrade, it may be concluded that the cause of our situation was man-made and could have been avoided.
Among the reasons provided by S&P for their decision to downgrade is the country’s weak economic growth – it has been performing at below 1%, making it the worst among the emerging markets rated by S&P.
The agency also stated concerns about a further deterioration of South Africa’s economic outlook and its public finances.
So uninspiring is our economic growth that S&P was not even able to wait for the much-anticipated national elective conference of the governing party before it acted, stating that whoever the ANC decided to elect as party and subsequently state president faces a very tough economic challenge.
In their view economic decisions in recent years have largely focused on distribution, rather than the growth of national income. As a consequence, South Africa’s economy has stagnated and external competitiveness has been eroded.
Of interest and of grave concern among the reasons cited by S&P for the ultimate downgrade is the following:
l A momentous political agenda has overshadowed policymaking despite the deteriorating economy and weakening public finances;
l South Africa’s economic growth performance is among the weakest of emerging markets’ sovereigns, with less than zero per capita growth; and
l Income inequality is among the highest in the world and has worsened since the turn of the century.
These are just some of the not so flattering reasons given for the downgrade.
In my previous piece, I made the point that despite its racial and economic divide, South Africa has not only been the continent’s jewel, but has also managed to show that an African country can be economically stable and possess the ingredients necessary to move towards developed nation status.
It is perhaps important to state that, though downgraded to junk status, South Africa’s outlook remains stable.
The reasons given for this is that the country’s credit metrics will remain broadly unchanged next year and that political instability could abate following the ANC’s elective conference this month, thus helping government to focus on designing and implementing measures to improve economic growth and to stabilise public finances.
There are indeed lessons to be drawn from these and other observations. Without doubt South Africa continues to face a series of unprecedented events, which if not arrested could lead to disastrous consequences for the country and its stability and which will, without doubt, undo the gains we have recorded since the dawn of democracy.
Already indications are that the downgrade could result in capital outflows of about R70-billion and that if Moody’s goes ahead and downgrades again in early 2018, this could trigger further outflows of about R140-billion.
The ripple effect of this is likely a depreciating rand, an increase in inflation and pressure on interest rates.
At the receiving end of all of this will be the already long-suffering poor who will experience a further increase in their levels of poverty.
According to S&P, other than an absence of investment, South Africa’s high level of unemployment is an outcome of an inflexible labour market with rigid wage-setting mechanisms and high barriers to entry and exit. This mix, alongside an inadequate education system, has contributed to the economy’s stark inequalities.
The effects of income inequality manifest themselves in various forms, including through violent service delivery protests and general lawlessness. These various manifestations of income inequality have very dire ramifications for the future of South Africa.
Daron Acemoglu and James Robinson, in Why Nations Fail, make the point that nations fail today because their extractive economic institutions do not create incentives needed for people to save, invest and innovate. Extractive political institutions support these economic dynamics by cementing the power of those who benefit from the extraction. They argue that the basis of these institutions is an elite who design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society.
Fortunately South Africa still has democratic institutions, a free press, and holds regular and competitive elections. It has economic institutions aimed at ensuring macro-economic stability and encourages the development of an inclusive market economy. These are the institutions and tenants that we need to strengthen and jealously guard.
Acemoglu and Robinson offer a few examples of how other nations have succeeded in their economic growth endeavours and how others can follow suit. They propose inclusive economic institutions that enforce property rights, create a level playing field, and also encourage investments in new technologies and skills.
If we are to remedy the situation we will need to go back to basics, introduce economic growth-inducing strategies, strengthen and bolster respect for democratic institutions, create a thriving economic environment that encourages both investment and innovation, and develop more productive relationship between government and business.
Leadership will have to demonstrate its seriousness about cutting back on spending and reducing ballooning government debt.
If we fail to do these things, we will pave a clear pathway for our once glorious nation to fail!
Sango Ntsaluba is executive chair of NMT Capital; co-founder of SizweNtsalubaGobodo and co-founder of the venture capital firm WZCapital
Act urgently to pull SA back from brink
At the time I noted that the possibility of a downgrade was no laughing matter, nor would it, if it happened, be the result of a conspiracy by market forces bent on destabilising an economy.
What prompted my warning was the prevalent level of complacency and what seemed like misinformation in relation to the effects of such a downgrade on the country and population.
This followed two consecutive downgrades by Standard & Poors (S&P) as well as Fitch, leaving South Africa’s economy on sub-investment grade. With no clear fiscal consolidation efforts and policy certainty it was evident that South Africa was staring a further downgrade – one to junk status – in the face.
As things stand, we are beyond discussions about the credit ratings agency trinity of solicitude. We are beyond the luxury of pontification.
Seven months down the line, we have arrived at the edge of the cliff. The chickens have indeed come home to roost and their impact will be felt for some time to come.
Already indications are that more job losses are on the cards, the prices of basic food stuffs and fuel will escalate, leaving mostly the poor to their own devices. It’s also important to note that sovereign downgrades will invariably lead to downgrades of private sector businesses through no fault of their own.
There are generally three factors that cause a country’s credit worthiness to be downgraded:
First, is what in Latin is termed a force majeure, meaning a superior force or unavoidable accident that will destabilise the markets.
Second, a downgrade could be prompted by a disaster or crisis, such as North Korea attacking the US, which will also result in the destabilisation of the markets.
Last, man-made actions.
Angus Duff and Sandra Eining in a 2014 paper on Debt Issuers remind us of one of the fundamental reasons for a credit rating: A satisfactory credit rating from a reputable credit rating agency is required to enable the (corporate) borrower to raise debt finance at an economic rate via the capital markets.
In 2016 government debt to GDP stood at 51.70 – its highest since 2006. The National Treasury’s Debt Management Report for the year ending March 2016 shows government debt service costs to be R128.8-billion or 3.2% of GDP.
This was before the downgrade to the low level we are now at.
Without casting aspersions or pointing fingers, but simply by following the sequence of events that got us to where we are as well as by looking at the reasons given by S&P for the downgrade, it may be concluded that the cause of our situation was man-made and could have been avoided.
Among the reasons provided by S&P for their decision to downgrade is the country’s weak economic growth – it has been performing at below 1%, making it the worst among the emerging markets rated by S&P.
The agency also stated concerns about a further deterioration of South Africa’s economic outlook and its public finances.
So uninspiring is our economic growth that S&P was not even able to wait for the much-anticipated national elective conference of the governing party before it acted, stating that whoever the ANC decided to elect as party and subsequently state president faces a very tough economic challenge.
In their view economic decisions in recent years have largely focused on distribution, rather than the growth of national income. As a consequence, South Africa’s economy has stagnated and external competitiveness has been eroded.
Of interest and of grave concern among the reasons cited by S&P for the ultimate downgrade is the following:
l A momentous political agenda has overshadowed policymaking despite the deteriorating economy and weakening public finances;
l South Africa’s economic growth performance is among the weakest of emerging markets’ sovereigns, with less than zero per capita growth; and
l Income inequality is among the highest in the world and has worsened since the turn of the century.
These are just some of the not so flattering reasons given for the downgrade.
In my previous piece, I made the point that despite its racial and economic divide, South Africa has not only been the continent’s jewel, but has also managed to show that an African country can be economically stable and possess the ingredients necessary to move towards developed nation status.
It is perhaps important to state that, though downgraded to junk status, South Africa’s outlook remains stable.
The reasons given for this is that the country’s credit metrics will remain broadly unchanged next year and that political instability could abate following the ANC’s elective conference this month, thus helping government to focus on designing and implementing measures to improve economic growth and to stabilise public finances.
There are indeed lessons to be drawn from these and other observations. Without doubt South Africa continues to face a series of unprecedented events, which if not arrested could lead to disastrous consequences for the country and its stability and which will, without doubt, undo the gains we have recorded since the dawn of democracy.
Already indications are that the downgrade could result in capital outflows of about R70-billion and that if Moody’s goes ahead and downgrades again in early 2018, this could trigger further outflows of about R140-billion.
The ripple effect of this is likely a depreciating rand, an increase in inflation and pressure on interest rates.
At the receiving end of all of this will be the already long-suffering poor who will experience a further increase in their levels of poverty.
According to S&P, other than an absence of investment, South Africa’s high level of unemployment is an outcome of an inflexible labour market with rigid wage-setting mechanisms and high barriers to entry and exit. This mix, alongside an inadequate education system, has contributed to the economy’s stark inequalities.
The effects of income inequality manifest themselves in various forms, including through violent service delivery protests and general lawlessness. These various manifestations of income inequality have very dire ramifications for the future of South Africa.
Daron Acemoglu and James Robinson, in Why Nations Fail, make the point that nations fail today because their extractive economic institutions do not create incentives needed for people to save, invest and innovate. Extractive political institutions support these economic dynamics by cementing the power of those who benefit from the extraction. They argue that the basis of these institutions is an elite who design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society.
Fortunately South Africa still has democratic institutions, a free press, and holds regular and competitive elections. It has economic institutions aimed at ensuring macro-economic stability and encourages the development of an inclusive market economy. These are the institutions and tenants that we need to strengthen and jealously guard.
Acemoglu and Robinson offer a few examples of how other nations have succeeded in their economic growth endeavours and how others can follow suit. They propose inclusive economic institutions that enforce property rights, create a level playing field, and also encourage investments in new technologies and skills.
If we are to remedy the situation we will need to go back to basics, introduce economic growth-inducing strategies, strengthen and bolster respect for democratic institutions, create a thriving economic environment that encourages both investment and innovation, and develop more productive relationship between government and business.
Leadership will have to demonstrate its seriousness about cutting back on spending and reducing ballooning government debt.
If we fail to do these things, we will pave a clear pathway for our once glorious nation to fail!
Sango Ntsaluba is executive chair of NMT Capital; co-founder of SizweNtsalubaGobodo and co-founder of the venture capital firm WZCapital
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