As the newly appointed Finance Minister Malusi Gigaba jetted off to the United States to “woo” investors and appease rating agencies one thing was certain, South Africa continued to find itself in an undesirable situation in the context of global markets.
Despite the racial and economic divides, South Africa had not only been the continent’s jewel but also managed to show that an African country could be economically stable and have the ingredients to move to developed nation status.
Not only did South Africa become a beacon of hope on the continent, but with the slide of its peer, Nigeria, has been one of the few African countries with a solid base that aided it to consistently remain investment grade.
Brazil for instance, is not only a peer within the Brics setting, but like South Africa, it is at a crossroads following a number of suicidal political decisions that sparked popular protests and political uncertainty.
While South Africa’s issues have been around “state capture” and “Nklandlagate” Brazil has been preoccupied with the Petrobas scandal which claimed political heads.
Brazil was downgraded to junk status in 2015 resulting in a sharp increase in the cost of capital and borrowing; reduction in foreign investment and an increase in unemployment from 4% to above 8%.
The downgrade of the Russian sovereign debt to “junk” in January 2015 resulted in the dampening of investor confidence.
While the ills that befell these countries cannot all be attributed to the downgrades, the coincidences are however, too glaring to ignore.
A question still lingers though, are rating downgrades conspiracy or fact?
The 2007-08 global financial crisis brought rating agencies under the spotlight as most analysts and standard setting organisations such as the Basel Committee expressed reservations over their methodologies; while some directly attributed the subprime crisis to their inadequacies.
One of the key criticisms levelled centred on the “issuer pays” model which many argue make the institutions susceptible to manipulation.
The rating agencies have reacted to post-crisis criticism by enhancing their assessment methodologies. To this end, the rating agencies have had to make some brave decisions, including downgrading the crown jewels and even the mighty US has not escaped their wrath.
The countries which have been subjects of downgrades by Standard & Poor’s include Brazil, China, Russia, the US, Argentina, France, Greece, Italy and the UK.
Whether the downgrades of these big economies can be viewed as signs of reform, courage or a smokescreen, remains to be seen. What is clear though is that South Africa’s downgrade is nothing peculiar in the credit market, neither is it a conspiracy against the government or the ruling party. The sooner we get into grips with this truth the better.
Some opinion-makers have argued for the creation of rating agencies for emerging markets, with the latest being the touting of Brics rating agencies. But however you look at it, the position our country finds itself in, is one of an undesirable state.
Like any diamond, South Africa has had its fair share of rough edges. Some glaring structural challenges affecting the country include high poverty levels, widening inequality, high levels of unemployment and an ongoing education crisis.
Post-apartheid, the divide between the rich and poor escalates by day and is ranked one of the worst in the modern day.
The ANC government has responded to some of these challenges with a gamut of initiatives including social grants, Black Economic Empowerment measures, and “willing buyer – willing seller land reform” among others.
Some of its policies have failed dismally while some are only short-term solutions which need to be buttressed by structural reforms on land, education and inclusive growth.
While the government has of late been humming the hymn of radical economic transformation, the policy has been devoid of substance.
The challenges have manifested into an increasing fiscal burden and a widening current account deficit, as the government grapples with over-competing needs.
At one point, government projected a deficit of R149-billion, translating to 3.1%. Against a backdrop of underperforming tax revenue, the government has had to rely on the debt market to raise financing.
Against a background of growth averaging at 0.7% over the past three years, the downgrade can elevate the possibility of a recession and a larger fiscal deficit.
It may well be argued that at least in the short- to medium-term, South Africa cannot finance its budget commitments out of its revenue collections. As such government will need to resort to debt markets.
Increasing debt is not only irresponsible on the part of the current generation but can become a yoke on the future generation if funds are channelled towards recurrent expenditure.
No one holds a crystal ball on how the country will fare following the downgrade. But one thing is for sure, the future is less certain than it was a year ago. It is therefore incomprehensible that some would see a funny side to the downgrade. The downgrade is no joke and we cannot be amused unless we seek to display ignorance or wish to show the communities who are still waiting for a “better life” the middle finger.
No matter which part of society one resides in, we should not play Russian roulette with the lives of people, the majority of whom cannot afford a normal meal.
- Sango Ntsaluba is co-founder of SizweNtsalubaGobodo and current chairman of NMT Capital.
OPINION: Ratings downgrade no laughing matter
Despite the racial and economic divides, South Africa had not only been the continent’s jewel but also managed to show that an African country could be economically stable and have the ingredients to move to developed nation status.
Not only did South Africa become a beacon of hope on the continent, but with the slide of its peer, Nigeria, has been one of the few African countries with a solid base that aided it to consistently remain investment grade.
Brazil for instance, is not only a peer within the Brics setting, but like South Africa, it is at a crossroads following a number of suicidal political decisions that sparked popular protests and political uncertainty.
While South Africa’s issues have been around “state capture” and “Nklandlagate” Brazil has been preoccupied with the Petrobas scandal which claimed political heads.
Brazil was downgraded to junk status in 2015 resulting in a sharp increase in the cost of capital and borrowing; reduction in foreign investment and an increase in unemployment from 4% to above 8%.
The downgrade of the Russian sovereign debt to “junk” in January 2015 resulted in the dampening of investor confidence.
While the ills that befell these countries cannot all be attributed to the downgrades, the coincidences are however, too glaring to ignore.
A question still lingers though, are rating downgrades conspiracy or fact?
The 2007-08 global financial crisis brought rating agencies under the spotlight as most analysts and standard setting organisations such as the Basel Committee expressed reservations over their methodologies; while some directly attributed the subprime crisis to their inadequacies.
One of the key criticisms levelled centred on the “issuer pays” model which many argue make the institutions susceptible to manipulation.
The rating agencies have reacted to post-crisis criticism by enhancing their assessment methodologies. To this end, the rating agencies have had to make some brave decisions, including downgrading the crown jewels and even the mighty US has not escaped their wrath.
The countries which have been subjects of downgrades by Standard & Poor’s include Brazil, China, Russia, the US, Argentina, France, Greece, Italy and the UK.
Whether the downgrades of these big economies can be viewed as signs of reform, courage or a smokescreen, remains to be seen. What is clear though is that South Africa’s downgrade is nothing peculiar in the credit market, neither is it a conspiracy against the government or the ruling party. The sooner we get into grips with this truth the better.
Some opinion-makers have argued for the creation of rating agencies for emerging markets, with the latest being the touting of Brics rating agencies. But however you look at it, the position our country finds itself in, is one of an undesirable state.
Like any diamond, South Africa has had its fair share of rough edges. Some glaring structural challenges affecting the country include high poverty levels, widening inequality, high levels of unemployment and an ongoing education crisis.
Post-apartheid, the divide between the rich and poor escalates by day and is ranked one of the worst in the modern day.
The ANC government has responded to some of these challenges with a gamut of initiatives including social grants, Black Economic Empowerment measures, and “willing buyer – willing seller land reform” among others.
Some of its policies have failed dismally while some are only short-term solutions which need to be buttressed by structural reforms on land, education and inclusive growth.
While the government has of late been humming the hymn of radical economic transformation, the policy has been devoid of substance.
The challenges have manifested into an increasing fiscal burden and a widening current account deficit, as the government grapples with over-competing needs.
At one point, government projected a deficit of R149-billion, translating to 3.1%. Against a backdrop of underperforming tax revenue, the government has had to rely on the debt market to raise financing.
Against a background of growth averaging at 0.7% over the past three years, the downgrade can elevate the possibility of a recession and a larger fiscal deficit.
It may well be argued that at least in the short- to medium-term, South Africa cannot finance its budget commitments out of its revenue collections. As such government will need to resort to debt markets.
Increasing debt is not only irresponsible on the part of the current generation but can become a yoke on the future generation if funds are channelled towards recurrent expenditure.
No one holds a crystal ball on how the country will fare following the downgrade. But one thing is for sure, the future is less certain than it was a year ago. It is therefore incomprehensible that some would see a funny side to the downgrade. The downgrade is no joke and we cannot be amused unless we seek to display ignorance or wish to show the communities who are still waiting for a “better life” the middle finger.
No matter which part of society one resides in, we should not play Russian roulette with the lives of people, the majority of whom cannot afford a normal meal.
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