I HAVE a new hashtag, #forheavenssakepayhimthemoney. It seems probable — perhaps not inevitable, but close — that SA will be downgraded to junk-debt status at the end of the year.
What will happen then? And is there any way to avoid it?
I grow more pessimistic by the day. Growth hasn’t leapt up, inflation hasn’t dropped and, most importantly, the ratings agencies have said very specifically they want to see active steps to improve SA’s governance efficacy.
Just as a reminder, this is exactly what S&P Global Ratings said when granting SA a downgrade reprieve in June: "We could also lower the ratings if we believe that institutions became weaker due to political interference affecting the government’s policy framework."
What happened last week is exactly that. In the words of Deputy President Cyril Ramaphosa no less, the government is at war with itself. Hawks Maj-Gen Mthandazo Berning Ntlemeza, who was happy to begin his career as a policeman during the apartheid era and who has been declared by a judge to be a liar without honour, now suddenly holds SA’s financial health in his hands. It would be comic if it weren’t so serious.
It’s hard to tell what would happen if SA were to be downgraded, and expert opinions differ widely. There is one theory that the changes wouldn’t be significant because the market has built in the expectation of a downgrade already. SA’s debt, for example, already costs what other countries below investment grade are paying; the rand is already cheap by international standards.
I don’t believe this for a moment. The problem with downgrades is that they become self-fulfilling prophecies. The currency goes down a bit, so inflation goes up a bit, so interest rates go up a bit, so growth goes down a bit, and then the cycle begins again. It’s not the result of a downgrade you are fighting. It’s the result of the result, and the result of the result of the result, and so on.
Another way of saying the same thing is that you are fighting a downward spiral, and the only way to do that is to improve confidence.
How does one do that? A new president perhaps?
There is one aspect of a downgrade that we can calculate, and that’s the cost of government debt. It’s not easy, but it’s possible if you assume that a whole bunch of things remain the same, although of course, they won’t. These include the government’s financing requirements, the exchange rate, international interest rates, inflation and so on. Just trying to do this relatively easy calculation shows what a moveable feast national finances are and why it’s so important to keep the ship steady.
Anyway, the good news is that an increase in interest rates that usually accompanies a downgrade to junk status won’t affect past government debt, but new debt, which will of course be more expensive. How much more? It’s difficult to say, but on average, let’s call it two percentage points.
Now, this past year, government’s financing requirement was R156bn. The interest rate applicable to that debt varies, depending on the term of the bond involved, but at a rough guess, it costs the taxpayer somewhere between 7% and 8%. So, all else being equal, government will probably pay about R13bn for the debt it raises just this year. The total cost over the duration will be, loosely speaking, equivalent to the loan itself.
It’s a hefty sum, even if you are looking at just a single year. The cost of paying total government debt is now the second-highest item in the budget. But let’s focus for a moment just on the increase, because that is what we can actually measure. If you assume interest rates increase post downgrade, then government will probably pay an extra R3bn.
So, here is a controversial suggestion: Since, fairly transparently, President Jacob Zuma’s first concern is feathering the nest for himself and his family, why not just pay him, say R100m, to go?
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That R100m would constitute only a sliver of what SA would tangibly lose every year if the country were to be downgraded. It sounds like a lot of money, but at this point, it would be eminently worth it — a savings of R2.9bn, if you will. Even Zuma’s main benefactors, the Gupta family, are fleeing the coop. If this is not a leading indicator that the party is about to end, what is?
There are, naturally, counter-arguments. Would Zuma’s departure be enough to avoid a downgrade? Who would take over? And most importantly, wouldn’t it create a precedent? SA may well find that every president from here on suddenly needs to leave after seven years on the job with a handsome golden handshake.
It’s a fantasy, of course. It won’t happen, and probably shouldn’t. Yet, the calculation shows how immediately expensive a downgrade would be. And it does illustrate the gobsmacking amounts of money at risk.
And yes, it is your money we are talking about.
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