Worrying but not surprising...

I’m no great fan of the whole ratings agency business.  They have been totally complicit in the recent credit and asset bubbles that have led to such dislocation in the global economy.  But the fact is that ratings are important in a world in which investors take heed to ratings.

South Africa has worked hard to get itself to the investment grade rating level (BBB- and above on the S&P scale) and inbound investment greatly benefits this country way more than many realise.

That’s why this story is so concerning.

South Africa needs to lower its 7.6 percent fiscal deficit projected for the current fiscal year if it wants to keep its BBB+ long term foreign currency rating, according to Standard & Poor’s.

“Running the kind of deficits they are running at the moment is not sustainable for too long,” Konrad Reuss, S&P’s managing director for sub-Saharan Africa, said in an interview in Cape Town today.

We really do hate to say we told you so, but it wasn’t exactly difficult to see this kind of thing coming.  The fiscal deficits projected over the next 5 years are monstrously large and will make SA seriously  fiscally vulnerable.  Based on a comment like this from S&P it almost looks like a drop from BBB+ to BBB is on the cards early next year.  This leaves SA with just one rung to buffer it (BBB-) between investment grade and junk grade status.

In a way I welcome a ratings downgrade for SA.  It might jolt the current policy makers out of their Keynesian-induced coma…

3 Responses to “Worrying but not surprising…”

  1. Grant says:

    I share your concern about the potential for a ratings downgrade, a ballooning fiscal deficit and its implications for the long-term costs to my own and many South Africans personal economic prosperity. I have also followed the discussions in Parliament this last week, in particular comments by Jac Laubscher “MPs balk at the idea of cutting spending” (The Star, Business Report, Wednesday 4 November) who also calls for cost cutting measures in the South African budgets going forward. It seems that economists are raising red flags around our economic trajectory and government is stubbornly sticking its head into the sand.

    All well and good – and yet it seems that at present economists such as Laubscher, Reuss and others want to speak about the SA economy in terms completely devoid of any recognition of the massive social inequalities that persist, and even more stubbornly seem to be ignoring the realities of these inequalities to the self-same economic outlook for long term economic sustainability. South Africa has been ranked either 1st, 2nd or 3rd in the world on the gini coefficient ranking (one measurement of inequalities within the country) for a number of years now, yet the implications of presentations such as Laubscher’s are that in order to reduce the deficit in the budget, social spending needs to be cut – a safety net for millions of South Africans with almost no other entry points into the SA economy.

    Excluding from the debate for the moment the debacle around SA’s never-ending payments for fighter jets and submarines we can’t maintain, which clearly has had a massive impact on the SA government’s abilities to balance the books, where is the acknowledgement in this type of discussion about the economic implications of continuing to rely on free market principles, small(er) governments and strong economic growth trajectories when the growth of the last ten years in South Africa has been jobless growth? Arguments that the market is the most efficient way to greater economic prosperity for all South Africans surely have to be treated with a heavy dose of scepticism if the market couldn’t deliver on these claims in the largest and longest economic expansion the world has ever seen? And if that is the case, then should we be more concerned about a rating on a scorecard (an influential scorecard as you point out) or the long term implications of failing to address the severe “dislocations” that South Africa is grappling with socially? As one former Vice-Chancellor of KZN once noted, there is compelling evidence to suggest that social development precedes economic prudence as a condition for economic development, which just may explain why SA has lagged behind countries like Brazil, Argentina and even Nigeria in the past ten years or so in a range of economic and development indicators (all of these countries have devoted significant efforts to improving the standards of living of their citizens irrespective of the economic costs).

    With the failure of the ‘market’ to deliver these gains in SA over the past ten years, is it really surprising that the government is trying to through its spending programmes to address the issue in the only way it can, that is by spending? A temporary and unsuitable solution to the problem to be sure, but then thus far the debate on alternatives is hardly a debate at all.

    • freeman says:

      Your comments are a common objection to free market economics. Your intentions are unquestionably noble, but the underlying arguments don’t hold up.

      Firstly, even if you do buy in to the view that we should distribute income to the poor, one has to ask: why are we going into deficit to do it?
      Secondly, SA has big inequality because of coercive economic policies of the previous government. Government intervention causes more inequality.
      Thirdly, jobless growth (it wasn’t strictly jobless but I take the point) was the result of un-free labour markets and onerous labour legislation. This has forced SA industry to focus instead on capital intensive endeavours. SA labour is hugely unproductive realtive to its cost compared with the rest of the world.

      The myth that it catching you out is thinking that SA somehow had a free market economy in the past 10 years. Not even close.

  2. Grant says:

    True – nothing original in what I am arguing here – and not much that is really original about the response either. What the essence of the argument you present boils down to is that free market economics WOULD deliver socio-economic development (whether as an end in itself or as a consequence of an elite class enrichment and the expansion of the middle class) IF free market economics were allowed to reign unfettered from government control.

    I am at single market economy anywhere in the world where such a market exists, and yet the fact remains that many of the most ardent social welfare states such as the Skandinavian countries are able to