How many wake-up calls does one need until the penny finally drops? That might be the question asked of SA as it reaches for the unwanted depths of the credit ratings universe.
Painful was how finance minister Tito Mboweni described the developments at the weekend, when Fitch Ratings and Moody’s Investors Service pushed SA’s rating further into junk. The latter, long accused of showing the country undue patience even as the fiscal picture deteriorated in recent years, has now downgraded the country twice this year.
Fitch was one of the more aggressive movers, and has SA three rungs below investment grade. S&P Global, the only one of the top three agencies not to act, already had the country three steps below investment grade, also having started its cycle towards the chaotic latter years of the Jacob Zuma presidency.
While S&P has a stable outlook, the next stop lower will take SA to the group regarded as having “significant speculative characteristics”. There are a few steps within that single “B” band before getting to the “C” nations with their various degrees of default risk.
Where SA is now, it is regarded as less vulnerable to missing debt payments than “other” speculative borrowers, but faces “major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor’s inadequate capacity to meet its financial commitments on the obligation”.
Discussing the Covid-19 crisis and the constraints the country faces in its ability to respond, Reserve Bank governor Lesetja Kganyago has spoken about its failure to fix the roof before the rains come. Who would have thought a little more than a decade ago when Trevor Manuel left the Treasury and handed it over to Pravin Gordhan, and the country had a debt-to-GDP ratio of a little more than 20%, we would be where we are now?
In that context perhaps it shouldn’t be a shock that few lessons seem to have been learnt, and that in the midst of this crisis, Gordhan's current department has pushed the country into throwing billions of rand into an airline that nobody believes is viable. Thanks to that, it is now not really possible to convince unions that there is no money for the SABC or Denel, or any other failing state-owned enterprise that one can think of.
The next step for SA is the single “B” grouping. With countries such as Bosnia & Herzegovina, Turkey and Uganda, it’s not the type of club anyone would aspire to join. As far as emerging markets go, we want to be more like a Chile at A+, or Botswana which, at BBB+, is one step above India. It took huge amounts of work and discipline, which has been squandered in the past decade, but SA can go back there with the correct policies and, more importantly, dogged determination to execute them.
“Recent downgrades saw SA reaching its lowest credit rating levels from the ‘big three’ ratings agencies since 1994,” the Treasury noted in its reaction, pointing to the reversal of the strides made since SA attained democracy.
It would be easy to blame Covid-19, but we’d fool nobody, except maybe ourselves, if we claim this wasn’t coming even before the shocks that started to reverberate around March. Warnings have been many and loud, but were largely ignored as the government concentrated on managing internal ANC warfare.
With the focus on the country’s debt, what sometimes gets lost is that SA also has a growth problem. If resolved, this could go a long way to sorting out the other one. Unfortunately that doesn’t mean, as some believe, that SA can simply borrow more and hope to create wealth by doing more of the same. The government could have spent the last couple of years implementing the sort of economic reforms it said are necessary.
Instead it allowed itself to be distracted into harmful interventions such as the push for a constitutional amendment to facilitate the expropriation of land without compensation. Just in the past week, the Reserve Bank and the Treasury had to make presentations to parliament once again explaining how harmful nationalising the Bank would be.
It’s a scandalous waste of time and intellectual capital when the country is facing its biggest ever economic crisis. Mboweni, who is often a lonely voice of reason within the cabinet, from time to time also floats crazy ideas, such as the use of barely existent national resources to form a state bank.
State-owned enterprises have brought the country to its knees, and it beggars belief that there is anyone, in the government or elsewhere, who thinks it might possibly need another one.
In its response to the ratings downgrades, the Treasury points out the cost. That’s another obvious point that needs to be repeated because there are some misguided people who don’t understand what the fuss is about.
In simple terms, the government has nearly R4-trillion of debt and spends about R226bn to service it. Falling down the ratings ladder means the cost of that debt servicing increases and SA gets charged more to borrow new money. That means there is less for its key development goals — to use a term much loved but little understood by ANC leaders.
Another clear demonstration of the costs was the Bank’s policy meeting last week. Reading the comments on inflation in isolation, the case for an interest rate cut was indisputable. Perhaps with an eye on the ratings downgrades and the potential impact on a market that’s already constrained by concerns over government finances, it decided to stay put.
That is a cost that can easily be quantified. Will we ever learn, or do we need to be in the same club as Venezuela before the penny eventually drops?
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