With malice aforethought
23 October 2017 20:48 (South Africa)
Opinionista Oscar van Heerden

My ‘Junk’ leadership, my ‘Junk’ Country!

  • Oscar van Heerden
    Oscar-van-Heerden.jpg
    Oscar van Heerden

    Oscar van Heerden is a scholar of International Relations (IR), where he focuses on International Political Economy, with an emphasis on Africa, and SADC in particular. He completed his PhD and Masters studies at the University of Cambridge (UK). His undergraduate studies were at Turfloop and Wits. He is an active fellow of the Mapungubwe Institute for Strategic Reflections (MISTRA) and is a trustee for the Kgalema Mothlante Foundation

All eyes will be on our financial institutions and the Treasury going forward. Providing anything other than the leadership we ought to get will set us back decades and unfortunately, whether the current leadership want to accept it or not, it will be recorded that they took the country from an upward socio-economic path to the junk status wilderness we now have to contend with.

Perhaps our starting point to wanting to understand South Africa’s ratings downgrade to Junk status (below Investment Grade) is to give a bit of context to the state of the Global economy.

Starting with the largest economy in the world, the USA under the Trump administration is increasingly moving their economy towards greater protectionism. The country that is really feeling the negative impact of this approach is Mexico but off course the entire world is also experiencing the effects of this inward looking approach by the US. There also exists the serious negative impact of FDI from the USA into for example Africa.

Next is Japan with its continuation of “Quantitative Easing” strategy, meaning they continue to provide the necessary fiscal and monetary stimulus as well as the necessary structural reform needed for their economy to not overheat.

The European Union and the impending Brexit by the UK further complicates the global economic outlook, notwithstanding the state of some of the EU member state economies like Portugal, Ireland, Greece, Spain and now Italy too.

Thomas Piketty in his now famous treatise, Capital, illustrates the inequality divide that exist between the haves and the have not’s.  Indeed he attempts to provide some suggestions as to how we can get ourselves out of this mess but alas, the sort of proposals he makes are a bitter pill to swallow for the super-rich in our world today. And so we continue on the downward spiral of widening inequality, poverty and absolute destitute for most.

Taking into consideration that kind of global outlook we must be circumspect when it comes to our own economy and indeed how we attempt to navigate our own triple challenges of inequality, poverty and stubborn unemployment.  So, when the rating agencies look at the state of any country and its readiness to attract investments, it looks at a number of criteria sets. It is well known for instance that all rating agencies agree that SA has very strong institutions.  A very transparent budgetary process, a very strong Revenue Service that indeed is aptly able to collect revenue/tax. A banking sector that is world class (though very expensive) and sufficient reserves and resources to hold their own among their peers globally. An independent judiciary, people’s Legislature and a free press. A most competent Treasury and certainly an independent and strong Central/Reserve Bank. 

That said, all of this only matters if you have the requisite leadership that can certainly navigate, manage and direct the economy and the necessary policies, to the benefit of its domestic markets and its citizens. Leadership, that is ethical and incorruptible and serves at the behest of the people.   

It is also true that our GDP, our Reserves, per capita, Human Development Index, LSE levels and  progress towards building a black middle class, are progressing very well since 1994. One only has to look at the recent report prepared by the Race Relations Institute (Silver lining) to understand that we have indeed come a long way in Mzansi.

When looking at the private sector however and their role in the on-going socio-economic transformation agenda in SA and the “confidence” that they have displayed over the last 20 years, it can only be classified as putrid.

When you engage them year in and year out they repeat the same adage - policy uncertainty, is what prevents us from investing in the SA economy. I sometime wonder whether this indeed holds true. Because when looking at the various policy choices over the last 20 years they all have a common thread running through each and every one of the policies and that is neo-liberal capitalist fundamentals, fiscal restraint and increasing our savings and/or reserves. This has not changed at all, so where is the policy uncertainty or are we nit-picking perhaps?  I concur that these policies have gone through many iterations, RDP, GEAR, ASGISA, NDP to mention a few but ideologically, nothing has changed since 1994, notwithstanding that after the opening up of the SA economy post-apartheid, our private sector could play in the global economy and thus make more profits.  So much so that the inequality gap has since widened between the rich and the poor in our country. 

Having debunked the global and SA economies, it brings me to the current matter of our downgrade to junk status. We must be clear that this downgrade will hit the poorest of the poor very hard contrary to the desperate nonsense being spewed by some of our politicians that a downgrade for the most part affects the rich people in our society.  Tell no lies, claim no easy victories!

Let me be clear, what this downgrade means to the average person in our streets is that the price of capital (money) has increased. In other words, if you want to borrow money, it is now more expensive to purchase/buy that money. That loan for your child’s education, that small car you have been saving for, the credit you take out for clothes and other essentials, a home loan and last but not least, that social grant you get is no longer worth what it was just a few days ago.  Petrol and basic food prices will increase and hit your pocket. 

Let me explain. The Government debt which stands at R2 trillion more or less is being serviced to the tune of R146 billion more or less per year. Now that we have been downgraded, the interest on that repayment amount will have to increase, when that happens, government look to our own local banks to borrow, but because capital is now more expensive, the banks will have to recoup their money from somewhere.  In comes you and me, the consumers.  The banks will allow the “trickledown” effect whereby the consumer will ultimately carry the burden of the price of capital.  And its not the rich that are having to borrow money, they have it already.  It’s the small, medium and micro enterprises that will be suffering. The catering service companies that service our weddings and funerals, the car wash entrepreneurs in our townships, the small subsistence farmers that require start-up capital and so many many more.

Some key points we must take stock of:

  • While S&P lowered its rating on only the foreign component of debt, Fitch lowered both long-term foreign and local currency debt.
  • The decision by S&P to downgrade the banks was so that they fall in line with the rating of the sovereign – due likely to direct and indirect influence of sovereign distress on domestic banks' operations.
  • The banks which were downgraded include Nedbank, Absa, Investec and FirstRand, all of whom are primary dealers that buy government debt and resell these debt instruments on the secondary market. The cost of buying high government debt will inevitably be passed on to the secondary market, which is you and I.
  • In 2016/17, the amount paid to service our debt was projected to be R146 billion, which is higher than the R130 billion budgeted for public order and safety ministry (police, our courts, prisons). The downgrade will see debt-service costs rise even further.
  • The core fiscal objective over the past few years has been to stabilise the debt-to-GDP ratio, with the net debt (gross debt including cash balances) projected to stabilise at 48 per cent of GDP in 2020/21. The debt stabilisation trajectory will most likely be pushed out further, thus delaying fiscal consolidation, putting further pressure on all of us.
  • Fiscal consolidation and sustainable public finances is a key metric that will likely get us back to investment grade. In the context of low growth, declining revenue collection and high interest costs – which have inflationary impacts, fiscal consolidation will be increasingly difficult to achieve people.
  • Most of government spending (wages and cash transfers) is linked to inflation. The high inflationary environment (a knock-on effect of the downgrade) will erode government’s purchasing power in the context of spending ceiling that is in place.
  • Government has already lowered its spending significantly since the implementation of the expenditure ceiling in 2012. Cutting spending further will create a negative feedback loop for economic growth, what this means is that if government cannot spend on new capital infrastructure build projects, which creates jobs for me and you, then we are in trouble people, and finally,
  • S&P:  lowered its rating of foreign currency-denominated debt to a sub-investment grade, rand denominated debt – which constitutes 90 per cent of the debt portfolio and retains its investment-grade rating.
  • S&P also downgraded South Africa's banks to bring their ratings in line with the country's foreign-currency rating of BB+ with a negative outlook.
  • Fitch: downgraded government’s long-term foreign and local currency debt to 'BB+' from 'BBB-' with a stable outlook, a non-investment grade rating.

It should also be said at this point that it normally will take any country 5 to 7 years to get back to investment grade status.  There has been some notable exception like South Korea but this is extremely unlikely in our case.

The leadership of the ruling party and government would like us to believe that the above does not matter to us poor people. That a downgrade only affects the wealthy in our society, in fact they go as far as making very callous statements about the downgrade and question the legitimacy of the ratings agencies. But like the governor of the reserve bank said when asked these very questions about the agencies at the report back session of the latest monetary policy committee report, it’s like the weather bureau, he said.

Just because you don’t agree with the forecast of inclement weather, changing the weather man does not get rid of the impending weather. You need to prepare for the worse, plan and execute accordingly, to withstand the weather.

It is of course commendable that people from all walks of life poured out into the streets to protest and voice their objections to this very unacceptable situation. After all, it does affect us all but I couldn’t help but wonder, where the same anger and passion was just a few weeks ago, when we heard of the collusion practices of our banks, which also affected the pockets of the ordinary citizen. Where was the anger at Helen Zille when she tweeted the most vile and inconsiderate hogwash about colonialism being a good thing?  If I was the ANC leadership, I would be very worried and not dismiss these protest actions, for when you look closely to those that poured out into the streets, it looks like your constituencies. Middle class and completely non racial but maybe it’s just me, I might be wrong. DM

  • Oscar van Heerden
    Oscar-van-Heerden.jpg
    Oscar van Heerden

    Oscar van Heerden is a scholar of International Relations (IR), where he focuses on International Political Economy, with an emphasis on Africa, and SADC in particular. He completed his PhD and Masters studies at the University of Cambridge (UK). His undergraduate studies were at Turfloop and Wits. He is an active fellow of the Mapungubwe Institute for Strategic Reflections (MISTRA) and is a trustee for the Kgalema Mothlante Foundation

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