Much attention has been focused over the past year on a potential sovereign ratings downgrade. At our 2016 AGM, S&P MD and Regional Manager for Sub-Saharan Africa, Konrad Reuss, said that on economic growth alone, South Africa would not be considered as investment grade. The prospect of a ratings downgrade for South Africa is indeed quite daunting as no African nation has ever returned to investment grade following a downgrade to sub-investment level. However, hope remains that we may stave off a downgrade this year – commodity prices have stabilised during 2016, the Rand has recovered to some extent, and the strength of our institutional democracy has been confirmed by peaceful municipal elections as well as the performance of the Public Protector and National Treasury.
Whilst political instability remains a pressing concern, particularly with respect to the negative impact that it has on policy implementation and regulatory certainty, ratings agencies typically base their decision on numbers rather than sentiment. The country’s longer term economic outlook is arguably far more important than the latest squabble between the President and his detractors, as long as our institutions remain robustly independent.
South Africa needs to reignite longer term economic growth through much-needed structural economic reforms. This remains valid irrespective of ratings agency decisions this year or next. In order to achieve increased economic growth in the medium-to-long term, structural reforms may be the finance minister’s only option as monetary policy easing and fiscal expansion are not possible at this stage. These structural reforms include the need to address fiscal inflexibility, reform of State Owned Enterprises (SOEs), and increased policy certainty, amongst others.
A significant concern is South Africa’s current level of sovereign debt – servicing of which consumes 12% of total annual government revenues. Increasing debt, and the consequent burden on the fiscus to service that debt, results in increasing fiscal inflexibility as less money is available for other initiatives – like addressing challenges with university fees or implementing new infrastructure projects, for example.
The most substantial driver of state debt is the performance of SOEs. Debt-ridden, poorly governed, and operationally inept SOEs not only consume a considerable portion of state financial resources, but also require substantial government guarantees. Reforming SOEs would reduce policy uncertainty and increase confidence and trust, especially with respect to issues around governance. South Africa needs politically independent, competent and trustworthy leadership at parastatals, who make policy decisions based on the best interests of the country. The debate around nuclear energy is a classic example of this – the vast majority of experts agree that our future lies in renewables and we have become global leaders in that space as a result of the REIPP programme. The sudden push for nuclear is therefore of considerable concern, especially given the likely impact of such an expensive, long-term initiative on an already troubled fiscus. Policy certainty in this regard would go a long way toward stimulating investment in the sector and creating much-needed jobs.
Whilst it is unlikely that all three major ratings agencies will downgrade South Africa to “junk” status this year, it will be inevitable at our current growth rate. Irrespective of the political noise, we are simply not investment grade when our economy is not growing fast enough. Projections for next year show a slight improvement to GDP growth above 1%, which may even be enough to avoid further fears of a ratings downgrade, but will certainly not be enough to address mass unemployment and other socio-economic concerns. South Africa requires significant structural reform and it will be incumbent upon all players in our economy – business, labour, academia, and government – to collaborate, make sacrifices, and play their part to grow an inclusive economy.