By Jac Laubscher, 1 February 2016
Apart from the negative practical implications such a development would have on the availability and cost of capital there seems to be a psychological revulsion to being described as “junk”. It is therefore not only the financial cost of a downgrade that is at stake (firstly for the South African state, but also for the corporate sector as its rating depends on that of the sovereign) but also the national self-esteem!
The consensus view seems to be that the looming ratings decision depends exclusively on the health of government finances and that the upcoming national budget will therefore be decisive in determining the outcome. The view seems to be in particular that if South Africa can demonstrate a credible commitment to stabilising the level of government debt and eventually reducing it, everything will be fine. I am afraid things are not as simple as that.
What is under scrutiny is the South African government’s capacity for analysing and understanding the country’s economic position, determining what its priorities should be, formulating the necessary economic policies to give substance to these priorities, and executing the chosen policies successfully. After all, the future of the South African economy does not depend only on the state of the fiscal accounts but also on its performance in all its diversity and complexity, involving all role players.
The outstanding feature of recent pronouncements by credit rating agencies on South Africa is the emphasis being put on economic growth, or more accurately the lack thereof. And not only growth in the short run, but also South Africa’s long-term potential growth rate. For example, when Standard & Poor’s announced on 4 December 2015 that it was changing the outlook for South Africa’s sovereign credit rating from stable to negative, it motivated its decision by declaring that “the negative outlook reflects our view that GDP growth might be lower than we currently expect”. Furthermore, “we could lower the ratings if GDP growth does not improve in line with our current expectations”.
On the positive side S&P declared that “we could revise the outlook back to stable if we observe policy implementation leading to improving business confidence and increasing private sector investment, and ultimately contributing to higher GDP growth”.
Given the importance of economic growth to the sustainability of government debt, summarised in the requirement that the growth rate should exceed the interest rate on government debt in real or nominal terms, their concern is understandable. At the moment South Africa does not meet this requirement on new debt, and the more the interest rate increases, the higher the required growth rate will become.
The fact of the matter is that South Africa’s growth prospects for 2016 and 2017 are already significantly lower that the latest forecasts of the rating agencies, making a downgrade to junk status a real possibility. As recently as December 2015 S&P and Fitch respectively forecasted a growth rate of 1,6% and 1,7% for South Africa in 2016 while the latest indications are that it will be less than 1%. Forecasts for 2017 are similarly over-optimistic and will inevitably be cut.
One of the occupational hazards of commenting on the South African economy for so long as I have been doing is the frustration of repeating yourself over and over again and to see little progress being made on critical structural issues holding back the economy. Economic growth, the need to make it an absolute priority, and the formulation and implementation of a comprehensive set of policies to create a favourable environment for growth top the list. That is why the South African government’s new-found zeal to improve the growth rate of the economy does not excite me.
In a commentary on economic growth I wrote last year I made the statement that the South African government did not have a growth policy. It still does not have one. To believe that calling a meeting of government, business and labour will somehow propel us onto a higher growth trajectory is naive.
The idea that we can decide on a growth rate and then manipulate the determinants of growth to ensure the desired result à la China is completely unrealistic. China’s struggle to come to grips with the impossibility of manipulating consumer spending (the future driver of growth) as it has manipulated investment spending (the growth driver of the past) through state-controlled credit and public investment, a large part of which was wasteful, is only starting now.
Government will do well to acknowledge that economic growth is not an objective one can directly achieve by doing this and that. All that one can do is to create the necessary conditions and allow growth to happen!
As pointed out by Adair Turner in his Lionel Robbins Memorial Lectures delivered in October 2010, economic growth “should not be considered the objective of economic policy, but rather the highly likely outcome … of two things desirable in themselves – economic freedom to make choices, and a spirit of continual enquiry and desire for change”. Government will do well to adopt these two principles as the foundation for creating conditions favourable for higher growth.
The first thing they (government) should do is to blow the dust off their own insights into what needs to be done for South Africa to flourish, starting with the National Development Plan (NDP), to which little more than lip service has been paid. It will also do no harm to revisit the Accelerated and Shared Growth Initiative for South Africa (ASGISA) that was shelved by the Zuma administration (and replaced with the Industrial Policy Action Plan and New Growth Path) for no apparent reason apart from the fact that it was the brainchild of the Mbeki administration, which perhaps also explains the lack of enthusiasm for the NDP.
At the risk of further frustration, I will repeat myself yet again. South Africa will have to find a better balance between promoting economic transformation and going for higher growth. Economic growth can no longer be relegated to a distant second place. The two objectives are after all not mutually exclusive ̶ it will be so much easier to achieve transformation targets in a high-growth environment.
The prioritisation of social objectives will also have to take a step back. If we can pursue policy measures needed for economic growth with the same vigour and dedication as we bring to the pursuit of social objectives, our chances of success will improve significantly.
As for avoiding junk status, the second part of this deliberation will deal with the required steps to be taken in the budget before coming to a conclusion.