Thought Leadership

Decisiveness called for with economic reckoning around the corner

02/12/2019 | By Busiswe Mavuso

We have been here before, perhaps one too many times: looking towards a date on the economic calendar with much foreboding, wondering what it might mean for the South African economy.

A couple of months ago, there was a lot riding on the convictions of finance minister Tito Mboweni to address our fiscal challenges in his medium-term budget speech.

The markets weren’t impressed, despite an overall welcoming of his politically contested economic plans.

Wariness has remained over just how committed the state is towards addressing its challenges, which equate to a very long shopping list and a shrinking income stream that cannot meet its obligations.

Judgment on the state’s attempts to sort out its finances is now largely in the hands of ratings agency Moody’s Investors Service. The other two big ratings agencies, Fitch Ratings and S&P Global Ratings, have long since downgraded our ability to repay debt to “junk” status, but Moody’s has remained on the positive side of the investment-grade line.

Call them friendly to the South African story, or more considerate of the structural fault-lines in our economy, but whatever their reasoning, they’ve resisted following the path of their peers.

But come February, we may run out of rope if promises made about the new political dispensation at the helm of the ANC aren’t translated into hard decisions.

The warning signs were contained in last week’s decision by S&P to cut its outlook on our debt to negative, raising the prospect of a deeper slide into junk territory. Should that come to pass – and the February budget will be the deciding factor – the only deduction is that Moody’s will have to follow suit.

At the risk of remaining a real outsider, Moody’s is more than likely to drag us into full “junk” territory. At the start of November, the agency downgraded its outlook for our credit rating from “stable” to “negative”. This is the final step before dropping a country into “junk”.

There’s a lot riding on the February budget, and indecision over the fate of SAA ahead of that date is a most worrying sign.

At the centre of SA’s rather rapid fiscal decline over the past five years have been the twin factors of a slowing economy and governance collapses at some of our largest SOEs, namely Eskom and SAA, with exploding debt levels as a result.

As well as the ratings agencies, global investors are taking a keen and very critical interest in what we can agree were SA’s “wasted” nine years.

This period is proving difficult to recover from, if you consider that government debt was 50.6% of GDP as recently as two years ago and is now standing at 61% – and will grow to above 71% of GDP by 2022.

To ground the feuding politicians, labour unions and other stakeholders in the South African economy – including our peers within the corridors of Business Leadership SA – in reality, one should remember what the implications of a descent into full-blown “junk” are.

A slide into full-blown sub-investment grade (a more palatable term than junk) would immediately spark the expulsion of South African bonds from Citi’s world government bond index. The index doesn’t allow bonds that are junk.

The gloomiest prediction I’ve seen about such a slide in SA’s ratings is that it would trigger more than R150bn of outflows and send the rand crashing.

You can bet that the Reserve Bank, which has been clear in its mandate to keep a lid on inflation and therein protect the value of our rand, would react with immediate rate increases.

With an economy that is a chronic sufferer from low consumer and business confidence, one can imagine what a rapidly weakening currency and rising interest rates would do to the retail, banking and other services sectors. Food prices that are already under some pressure from poor weather would rise further, and the poorest of poor would see it in the bread price.

Of course, there’s a school of thought that suggests that the markets have long factored in our slide to full-blown junk come February and that actually South African assets may rise in its aftermath, as long as sentiment towards emerging markets remains supportive

Many had hoped that indecision would be history under this sixth administration. Right now, we really need some decisiveness.

To be fair, there have been some positive examples – an administration that has looked to bring more certainty into the South African story with the timely release of the Integrated Resource Plan by the department of mineral resources & energy; the department of public enterprises’ white paper on Eskom; and, more recently, the appointment of Eskom’s new CEO.

There can be no let-up, however – not when there’s a day of reckoning just around the corner.

• Mavuso is the CEO of Business Leadership SA