Although not totally unexpected, Moody’s Financial Services’s downgraded of South Africa’s long term foreign and local currency debt ratings to ‘Ba1’ from ‘Baa3’s. Photo: Scott Eells/Bloomberg
Although not totally unexpected, Moody’s Financial Services’s downgraded of South Africa’s long term foreign and local currency debt ratings to ‘Ba1’ from ‘Baa3’s. Photo: Scott Eells/Bloomberg

SA must embark on urgent structural economic reforms

By Bonang Mohale Time of article published Mar 29, 2020

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JOHANNESBURG – ‘We can feel sad, hurt and demoralised but we can’t give up.’  - Patrisse Cullors

Although not totally unexpected, last night’s Moody’s Financial Services’s downgrading of South Africa’s long term foreign and local currency debt ratings to ‘Ba1’ from ‘Baa3’ and maintain the negative outlook is a economic earthquake, financial tsunami and a social catastrophe.

The key drivers cited by Moody’s are South Africa's "structurally very weak growth and constrained capacity to stimulate the economy and inexorable rise in government debt over the medium term".

This now completes the triumvirate of rating agencies finally all agreeing that South Africa is not doing enough to balance its own books, live within its means and build enough resilience to withstand unforeseen events. The impact will be both immediate and devastating. The timing couldn’t possibly be worse. 

This means that firstly, we will pay a premium on our current debt - (money that is already in the country) and secondly, this could soon reach a stage where people are just not prepared to extend debt - (money wouldn't come into the country) to us, and if they do, it will only be at ever higher rates.

A lot of fund managers who are not allowed to be in countries that are 'sub-investment' will have to pull out of South Africa. This may prompt investors to further ‘dump’ as much as (some say) R100 billion of South African assets. 

This will lead to further weakness in the rand. 

South Africa will be removed from JP Morgan's $59bn 'three indices' fund typically run from April to May. South Africa will then fall out of the World Government Bond index. The rand will depreciate and thus increasing the price of imported goods. 

The SA Reserve Bank might be forced to hike the repo rate, thereby, reignite inflation. The cost of borrowing will rise for both government and ordinary citizens. 

The government will have much less money to spend on infrastructure, service delivery and social grants. South Africans will pay more interest on their houses, cars, etc. Bread, milk, electricity, petrol, etc. will cost more. 

The currently anaemic economic growth will stall even further. 

More companies will be forced to close down, leading to more retrenchments and thereby increasing the already stubbornly high levels of unemployment. All these will lead to both low business and consumer confidence, therefore both low domestic and foreign direct investments and by definition, no new job creation. Political distress increases and the social fabric becomes severely stressed. 

South Africa’s one hand was already tied behind its back by years of corruption, state capture and elevated policy uncertainty that eroded economic growth and business confidence. It’s other hand is now also tied behind its back by the coronavirus pandemic of the 2019 strain, hence the nomenclature: Covid-19. It’s one leg is tied up by the technical recession we are currently in. 

The relegation to ‘sub-investment grade’ now ties the remaining foot to totally immobilise us against this pending global recession. The tell tale signs were already evident for all to see. What with substantially lower tax revenue of about R1.36 trillion representing about R25bn shortfall. 

This was occasioned by, among others, both a decline in company profits and a drop in employee tax; lower dividend taxes due to lower gross domestic product growth at 0.2 percent; a drop from 7 500 and now only 6 500 taxpayers who earned more than R5 million per annum; only about 120 000 high income earners who are taxed at a rate of 45 percent and account for about 30 percent of South Africa's personal income tax; and a drop from about 3.2 million and now only 2million companies that are registered for income tax.

Another indicator is the bloated public sector wage bill from R230bn in 2008/9 to now R585bn and rising by more than inflation annually. Our budget deficit is now rapidly approaching 6.9 percent from 6.2 percent of gross domestic product, etc. 

We have been at the ‘fiscal cliff’ for some time with both business and consumer confidence at its lowest since the 2008/9 global financial crisis. 

Fixed investment by the private sector, the wellspring of economic growth and jobs, has fallen since 2014. Fiscal metrics compound downwards and a 'debt trap' looms. Historically, South Africa almost always got bailed out by positive global developments. In, at least the last four consecutive Medium-Term Budget Policy Statements, we have missed our own plans by a mile.

Fortunately, we know that the three ratings agencies will be looking for four demonstrable actions, to review our investment grade, viz. economic strength, fiscal strength, institutional strength and susceptibility to major event risk.


Bonang Mohale, the Chancellor of the University of the Free State, says because the government currently has no money, our only salvation is business. Photo: Supplied
Bonang Mohale, the Chancellor of the University of the Free State, says because the government currently has no money, our only salvation is business. Photo: Supplied


So, what needs to be done?

We must urgently embark on much needed and long overdue massive structural economic reforms and thereby send, by our deeds not just words, signals that South Africa is on a plausible path towards dealing with its most fearsome challenges. We must drastically reduce the bloated public sector wage bill and thereby change the current dismal narrative about South Africa and annul fears that a Moody’s downgrade is a death sentence. We must charge the top state capture miscreants.

We must deal decisively with the R450bnEskom debt and the R128bn cumulative bailouts. The focus must be on a inclusive socio-economic growth and transformation. 

We must genuinely believe that the country warrants a lower risk premium. We might want to consider tax credits for companies that invest in large scale job creation, especially for the youth. With monies saved from the annual ‘irregular, wasteful and fruitless expenditure’, we might want to redirect and increase government investment in social and economic infrastructure, like water (the next looming catastrophe ) and sewer projects; in housing; public buildings; a safe, accessible and affordable public transport; and in road and bridge maintenance that has a high employment impact. We have to focus on land reform and agricultural support programmes directed at supporting young people to find work opportunities as well as scaling up the expanded public works programme. 

All of South Africa’s problems and all solutions are both well understood and articulated, in a myriad of plans, especially the National Development Plan 2030.

Professor Imraan Valodia’s January 30 article made three uncontroversial assertions that many of our economic problems will ease if the economy starts to grow; that a capable state is vital for any economy to grow in the modern capitalist system and that we need efficient and effective enterprises. 

We must urgently embark on a few but sustained actions if we are going to succeed in convincing, at least one of the three ratings agencies that we will emerge out of this recession in the shortest period of time by ruthless execution of what needs to be done. Additional tax revenues are urgently needed. 

We must reduce future transfers to state-owned enterprises that in the past, were systematically slammed with hurriedly promoted, usually untested, largely incompetent and often corrupt 'cadre deployments' where performance was not even expected.

The disposal of non-core assets is imperative which might free up about R7bn. Because the government does not have the money, options for private sector participation (PPP) is our only salvation in this current crisis.

Business no longer really has a choice about declaring the values they hold dear, adhere to and about making a vocal stand about these. It is now expected of them. Today, society believes that business now bears equal responsibility with government to drive positive social change. 

This illustrates a fast shifting mood towards social justice in society’s mindset. We have now entered the age where the ‘weapon of mass destruction" is social media that has hugely empowered ordinary people to hold business accountable.

As companies have grown in size and power, ordinary people are increasingly expecting more from them to drive positive change and to work towards the greater good, rather than acting solely on the basis of business’ own agenda. 

This is an uncomfortable space for business to enter. Only making money was, up until now, the main pursuit of ‘old’ business. But finding purpose is pivotal to the ‘new’ business. Business must make the shift from a ‘sales-based’ to a ‘values-based’ way of thinking and doing. Business now has to answer to a very different type of stakeholder. In this era, fence-sitting is no longer an option for business. Being ethical - visibly so - is mandatory.

We know that reduced public spending leads to enhanced government creditworthiness, which leads to falling bond yields and which in turn leads to falling interest rates for all borrowers, which ultimately leads to increased private sector investment.

Because the government currently has no money, our only salvation is business.

Bonang Mohale is the Chancellor of the University of the Free State.

BUSINESS REPORT

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