Junk status is a challenge we need to rise to
There’s no doubt that our bond market will be affected; South African government bonds will fall out of the FTSE World Government Bond Index after the rebalancing next month, which is likely to lead to capital outflows. Foreign investors might change the way they invest in our market. We might begin to see fewer foreign pension funds investing for the longer term as they used to.
They might be replaced by speculative, shorter-term “hot money” dipping in and out over shorter terms driven by the relative investor appeal of higher yields in developing markets, such as ours.
But will they? That was the old wisdom before the outbreak of the novel coronavirus. It’s uncanny that I did my PhD thesis in 2014 on the effects of an economic contagion - also emanating from China - and we now have a global health crisis that is changing how we think and how we act.
Markets and people are panicking as Covid-19 translates into complexity and the fundamentals turn counter-intuitive, creating even more volatility both in South Africa and across the globe. The upside to this is that the information value from ratings agencies is offset by the overarching Covid-19 crisis, forcing investors to turn to better predictors of government action and future economic growth.
There’s also the theory that global capital markets are efficient and already appear to have priced in the sub-investment grade risk that South Africa reflects, before Moody’s rubber-stamped this. In light of all this, I believe that we could partially bounce back once the negative sentiment settles and developed world investors start to search for yield.
What does this mean for hard-working South Africans? The real economy will be affected, as will the capital economy. Imports will cost more as the currency devalues. And bank loans will cost more, meaning that the cost of living will be that much more expensive. Our ability to grow our economy and create much-needed jobs will be even further constrained.
As it is, our fiscal situation is not healthy, and we need stimulus packages from a government that is already fiscally strained. There is no doubt that the effort put in through the announcement of tax subsidies and incentives, the use of the Unemployment Insurance Fund, the establishment of the Solidarity Fund and the generosity of the Motsepe-Rupert-Oppenheimer donations will go some way to cushion the blow to the economy and stimulate small businesses, but more will have to be done.
Junk status will have major implications for us as a country, there’s no sugar-coating that, but it could fast-track structural reforms accompanied by essential policy and economic shifts. The government has to reduce its debt, particularly in areas that have limited benefit to business. One of the key areas will be the continued funding of state-owned enterprises.
The good news is that we can get out of this; we have done it before, in living memory too. I was finishing university at the time we were last downgraded to junk. We emerged into the dawn of a democratic South Africa in 1994 rated as sub-investment grade by Standard & Poor’s and Fitch, but by 1999 we had climbed to BBB- as rated by them and Baa3 by Moody’s, which would rate us as high as A+ 10 years later. That decade was the highest economic growth we had experienced in 35 years - so it can be done.
Navigating through this will take incredible courage and great resolution, but that’s precisely what we are renowned for as a country. We did it in 1994, we did it in 2018, now we have a president whose management of the global crisis should fill us all with immense confidence.
Leila Fourie is the group chief executive of the JSE.