South Africa on the brink: Could this be a Matamela Moment?
Our estimates have already been revised to 0.4percent from 0.9percent.
Fourth-quarter gross-domestic product (GDP) figures this month also confirmed our worst fears, South Africa is in recession.
The euphemistic qualification of a technical recession simply sugar coats what's clearly a deepening crisis.
Our economy has been on steady decline in the last 10 years. The coronavirus simply compounds the challenges.
There is also great anticipation on Moody’s announcement towards the end of the month as this is the only ratings agency that still has our sovereign debt above sub-investment grade. Will a downgrade by Moody’s spell an economic apocalypse?
Expert opinion is divided on whether a downgrade will intensify the economic and financial crises.
What is certain, however, is that the simultaneous downgrade of both international and domestic currency debt will have a significant impact on the financial stability of the country.
It will certainly result in South Africa being excluded from the remaining major global bond indices.
South Africa is reliant on portfolio flows to finance the current account deficit due to low exports. A sub-investment downgrade will adversely affect these flows and will see the increase in debt servicing cost.
A credit downgrade will therefore be a double whammy: it will increase the cost of debt and reduce the fiscal space.
Unless managed carefully, credit downgrades may spawn a pro-cyclical economic situation triggering a vicious cycle of higher debt service cost and a further downgrade.
But as the agencies often say, their sovereign rating is not a recommendation for creditors to sell or hold any instrument but an assessment of the issuer’s credit risk from economic and political risk.
Economic risk is about the government’s ability to repay its obligations on time and the political risk addresses its willingness to pay.
The ratings are therefore forward looking and assess the likelihood that an issuer will default on its obligations.
This implies they can always be persuaded otherwise if the country manages its engagement with them properly.
The recent comments by some of the governing party senior officials seem not to understand this fact.
Finance Minister Tito Mboweni has indicated that South Africa has won before and can win again. This may sound like blind optimism and even downright deception to cynics.
However, the world is not short of examples of remarkable economic comebacks and turnarounds in the face of even worse economic crises. The most celebrated case that had strong resonance with South Africa is South Korea.
In 1962, South Korea's per capita income was a mere $87 (R1450). It was lower than some of the African countries. Fast forward to 2018, South Korea’s per capita GDP is $30000.
It is now the 11th-largest economy and the fifth-largest exporter in the world. In 2015, it was ranked sixth in terms of foreign exchange reserves, and was in the top 20 in the Human Development Index.
All this in a country that only has 50 million people.
The country's joining of the OECD Development Assistance Committee effectively formalised its graduation from a developing to a developed country. The economic and political fortunes of South Korea will not be complete without mentioning the role of two figures, General Park Chung-hee and Kim Dae-jung, who were elected presidents from 1963 to 1979 and 1998 to 2003 respectively.
Park used state intervention to drive aggressive export promotion, import substitution, light and heavy industrialisation. He also oversaw the establishment of huge conglomerates, the chaebols. Love or loathe him, he built the economy to be the giant it is today with an iron fist.
When the country experienced another crisis in 1997, it was left to his political nemesis Kim to basically restore and lead the recovery of the economy. Kim’s political career was almost truncated. He survived assassination a few times, was abducted, exiled and jailed. He is the only South Korean who won the Nobel Peace prize and is often referred to as the Nelson Mandela of South Korea.
South Korea survived economic crises in 1997 and in 2008. The first largely emanated from the external shock. There was a rapid devaluation of the currency and international lenders rushed to unwind and call up loans to the banks.
When the international rating agencies downgraded the country, it had no option but to turn to the IMF for bailouts that included deep structural reforms, stringent austerity measures that were unpopular and the depreciation of currency that basically obliterated a sizeable number of businesses.
It took the erudite consultative and the immensely likeable Kim to steer the country from the brink of bankruptcy through brilliant crisis management, carefully sequenced structural reforms and strengthening of democratic institutions.
On the international front he pursues engagement with North Korea, which came to be known as the Sunshine Policy. The 1997 crisis was more severe. At one stage South Korea was downgraded by the rating agencies by about nine notches in the midst of the crisis.
South Korea, however, was able to bounce back with an investment grade 13 months later. This was nothing short of an economic miracle that no other country has been able to achieve to this day. It is reported that 4.3million people collected and contributed gold to pay back the IMF loan.
The lessons of East Asian crises, in general, and South Korea, in particular, are instructive. South Africa might not have had success similar to South Korea. Except between 1995 and 2005 when there was modest growth, South Africa has been in a steady decline for the past 10 years.
Structural reform will need a careful sequencing for optimal effect. While President Cyril Ramaphosa’s infrastructure investment project is at the centre of his economic turnaround strategy, it is by no way a panacea.
Infrastructure contributes to economic growth through productivity improvement and as such it should be of quality and sustainable.
Just like South Korea, we have a fiscal debt that is unsustainable with prohibitive debt servicing costs. The disarray in our state-owned entities requires massive funding injections to bring them to some semblance of functionality.
The tight fiscal measures are inevitable and are likely to be very unpopular. Eskom, has been limping and its operations have been in fits and starts hence.
Under these circumstances, you will need the finesse, credibility and inventiveness to navigate the country out of these woes. The reality is that our economic problems can hardly be resolved without some form of internal consensus and external negotiating with the international lenders.
At this level, arrogance must give way to analysis and brawn should make way for brains. The vulnerable state of our economy simply means that populism must yield prudence as must rancour for rigour.
Ramaphosa had a series of meetings, including the summit with development finance institutions on infrastructure; a review meeting on job summit and recently chaired the Presidential Co-ordinating Committee where all spheres of government meet.
In dealing with the unexpected impact of coronavirus, Ramaphosa has announced drastic measures that have his hallmark of being measured, thorough and comprehensive.
People may be disenchanted with his consultative style and some see this approach as his greatest weakness and indecisiveness. However, given the depth of our economic crisis and possible scenarios that may pan out, Ramaphosa may just be the leader we need.
If the South Korean experience is anything to go by, his consultative and consensus building may be South Africa’s strength. Just like Kim demonstrated, credibility, consensus and compromise hold the key in managing crises.
Ramaphosa is known for working very hard. Perhaps someone may have to whisper in his ear that in the face of crises, he may do even better by not working harder but smarter as well.
In the midst of our economic crises, can we say “Cometh the hour, cometh the man”.
Landiwe J Mahlangu is the chief economist at Amazwe Analytics and Advisory.