An alarm recently sounded for the SA economy. But like the car and house alarms we have become accustomed to, South Africans simply ignored the credit warnings from Standard & Poor’s (S&P), Fitch Ratings and most recently Moody’s Investors Service. Many commentators have reacted to S&P’s decision to lower SA’s credit rating to BBB- and Fitch’s decision to change the country’s rating outlook to negative with the soothing assertion that there is no need to panic – yet. Our current ratings are, after all, still on par with our emerging market peers such as Russia and Brazil. But should we be satisfied with merely keeping up? Are we that complacent a nation? Given that we’re already lagging behind our peers in terms of economic growth, can we afford to be complacent?

S&P and Fitch address the crippling strike in the platinum sector, its negative impact on economic growth and the country’s stubborn current account deficit as principal reasons for their ratings. Moody’s has kept a negative outlook on its rating of SA since 2011, but as the nation’s metalworkers set off on a strike, the agency cautions that the ‘strike-prone nature’ of SA is hurting its reputation. ‘Continued weak investment, exports and overall growth will pose serious challenges to the government’s efforts to rein in its budget deficit and stabilise its debt metrics, a credit negative for the economically troubled country,’ said Moody’s.

S&P not only downgraded SA because of recent events, it also warned the country that its economy is unlikely to grow at a sufficient pace in the current fiscal year. Let’s put this into perspective. If SA was a company, S&P would be telling investors to steer clear because our prospects for the future look bleak. Why would any investor choose to put their money in a floundering business when there are many others that offer better expected returns?

The truth is that SA’s problems and challenges cannot be placed squarely on the shoulders of labour unions, government or industry. Our country has deep structural problems that have become entrenched over many years; we are deluding ourselves if we believe that the weaker economic growth the country is experiencing is just the result of global pressures or a passing cyclical dip.

What is alarming is that S&P does ‘not believe [Jacob Zuma’s newly elected administration] will manage to undertake major labour or other economic reforms that will significantly boost GDP growth’. Fitch agrees that ‘government faces a challenging task to raise the country’s growth rate and improve social conditions, which has been made more difficult by the weaker growth performance and deteriorating trends in governance and corruption’.

Fitch is right to point out that SA will never achieve the economic growth we need as long as corruption remains present in our society. Corruption is not one sided: there is after all a corruptor on the other side of every corrupt person. Corruption is a great barrier to creating an equal society – it essentially ‘steals’ from the poor and gives to the rich and connected. Corruption not only siphons away money from crucial services such as healthcare and education, but also prevents money from being spent on projects and policies that can generate future growth. And we should not tolerate it.

Following these sovereign downgrades, our economy has become less attractive to investors and the risk attached to the government’s ability to service debt has increased. As a consequence, borrowing becomes more expensive for both government and state-owned enterprises. Paying higher interest on borrowing amid rising inflation and a widening budget deficit will become increasingly difficult even if other expenditures are curbed. It will increase the price tag of much-needed infrastructure development and reduce the amount available for the government to spend elsewhere. A lower credit rating will push up the price of economic growth at a time when the country can ill afford it.

A further downgrade from S&P will also plunge SA bonds into junk status and force many global institutional investors to reconsider their investment case; many mandates do not allow investors to hold bonds rated below investment grade and this, in itself, could cause a large sell off of government bonds. If Moody’s follows suit and downgrades SA by another two notches, the country may also be forced out of Citi Group’s World Government Bond Index (WGBI).

Our inclusion into WGBI (September 2012) was not just because SA ticked all the required boxes, but because we had run a tight fiscal ship in terms of our size, credit and lack of barriers to entry. The inclusion in the WGBI is not immediately threatened – evaluation of this would take place only if the local currency bond rating by Moody’s and S&P falls below investment grade, a distant prospect. However, it was a hard slog to achieve the required prudent fiscal and macroeconomic policies and a reflection of all the effort it took to turn SA into an attractive investment destination post 1994. These sovereign downgrades have undone much of the hard work of the past 20 years.

This does not mean that we can never regain the ground we have lost. The National Development Plan (NDP) sets out the way forward. Let’s not settle for discussion and debate about the merits of the NDP or specific initiatives it proposes. Let’s put growth at the centre of our agenda for the future and concentrate on delivering those initiatives which speak to that growth. Let’s do this collaboratively: as business, as government and as civil society.

We simply cannot afford to waste any further time. These changes will become more and more urgent with every passing month – and not because of comments from any rating agency. SA needs to work hard to move the country from our current position – complacent and uncompetitive – to deal with the structural problems we face. This is urgent because SA and its people deserve the strong and growing economy we all can help to build.

The challenges that we face – education, healthcare and the like – might seem daunting. At the JSE, we take heart by remembering that we were in the same position nearly two decades ago where we languished near the bottom of global rankings in trading, clearing and settlement and regulation. Yet we took a conscious decision to change this, not by asking for help or blaming our circumstances, but by tackling problems head on. We just got on with it. As they say: ‘How do you eat an elephant? One bite at a time.’

Nicky Newton-King
Chief Executive Officer, JSE

July 2014
Image: Hanlie Huisamen