Johannesburg - Regardless of whether Standard & Poor’s downgrades SA tomorrow or not, the economy is still in trouble.
This is according to University of Stellenbosch Business School (USB) professor André Roux.
S&P and Fitch both rate South African debt one level above junk. Fitch will announce the outcome of its review on Wednesday.
Despite sentiment seemingly leaning towards a downgrade, finance minister Pravin Gordhan is optimistic the country has done enough to avert a downgrade.
Speaking on Bloomberg TV yesterday, the minister said “I think we’ve done enough to pass the June hurdle...In the next six months we have to do more, particularly in terms of implementing what we’ve decided.”
Read also: Gordhan: SA has done enough to avoid downgrade
Reserve Bank governor Lesetja Kganyago, however, has noted that the ratings preview cannot be predicted, but conceded that the economy is in a bad way.
SA’s economy has been hit by the worst drought in a century and growth is stagnating, with the country expected to grow at less than 1 percent this year.
Roux says a downgrade would be neither the beginning nor the end of South Africa’s economic woes.
“With or without junk bond status our economy remains in distress.”
Roux explains there fault lines in the country’s economy that makes him look beyond a possible junk bond status. He says there are several structural obstacles in the economy causing the current disappointingly low economic growth rate.
These are:
1. South Africa has become a nation of debtors, including government and households, all living beyond their means; as well as the fact that we import more than we export. The flipside to this is that as a nation we are not saving enough – and savings are crucial to finance investment and to generate future and robust economic growth. In these circumstances we have no choice but to rely very heavily on foreign investment, but in light of various political, policy and macro-economic uncertainties, investors have become more reluctant to invest here.
2. Production factors are not being used efficiently. As a result it is becoming increasingly difficult to be internationally competitive on the export side – in fact, imported goods are often cheaper than locally produced goods. This lack of competitiveness is aggravated when wage increases are in excess of productivity increases.
3. As an open economy, SA is also always vulnerable to global forces. So, for example, on-going disappointing growth in Western Europe compromises our export performance. The tightening of monetary policy in the US also contributes to the weakening of the rand exchange rate as portfolio managers withdraw their investments.
4. Policy makers have virtually no scope for stimulating the economy. In light of growing government debt, fiscal policy cannot be expansive; and with inflation moving upwards the SA Reserve Bank’s policy stance is biased towards rising interest rates as we saw earlier in the year and with more expected.
Read also: Gordhan confident as ratings review looms
Given these fundamental constraints there is a risk that junk bond status could plunge SA into a full blown recession. But even in the absence of junk bond status, economic conditions for consumers this year will probably be the most depressing since 1994.
IOL