S&P’s downgrade deals severe blow to South Africa’s inclusive growth and economic transformation

05 April 2017 Leon Campher, ASISA
Leon Campher, CEO of ASISA.

Leon Campher, CEO of ASISA.

Standard & Poor's downgrade of South Africa's global credit rating to junk status is the unfortunate consequence of a complete reversal in Government’s governance and macroeconomic management strategy implemented since 1994 to stabilise the country’s fiscus. This is according to the Association for Savings and Investment South Africa (ASISA).

For the past 15 months South Africa had been teetering on the brink of a downgrade to junk status, narrowly avoided until this week by the concerted efforts of the Finance Ministry under the leadership of Pravin Gordhan, labour and business through the CEO Initiative.

Leon Campher, CEO of ASISA, says unfortunately the hard fought for reprieves came to nothing when Standard & Poor’s announced its downgrade on Monday, citing political risks and policy shifts that could undermine fiscal prudence and economic growth outcomes. Moody’s has also placed South Africa on watch for a possible downgrade.

“As custodians of close to R9 trillion in savings and investments belonging to South African citizens, our industry is very concerned,” states Campher.

“As a result of this downgrade, Government’s goal of inclusive growth and economic transformation for the benefit of all South Africans has been dealt a serious blow, potentially delaying the implementation by many years.”

ASISA and its members share Government’s goals for economic transformation and ASISA’s strategy therefore remains closely aligned to the goals of the National Development Plan (NDP), primarily to foster inclusive economic growth.

“Achieving inclusive economic growth for South Africa requires significant investment both from foreign investors and the South African private sector. However, irrational decision making undermines policy certainty, which has a negative impact on potential foreign and local investment and capital deployment.”

Foreigners, mainly pension funds, own 39% of the top 100 companies listed on the JSE to the value of around R2 trillion and 30% of South African bonds in issue to the value of R1 trillion.

“As soon as a country loses its investment grade rating, many of these foreign investors may be forced to withdraw their money, which could result in a large scale sell-off of both equities and bonds”, explains Campher.

He says this will result in a decrease in the value of the savings and investments of South Africans, including those held in pension and provident funds, by among others, the country’s mineworkers, nurses and teachers. It will also increase the cost of servicing Government debt, which means that there is less money for social welfare, education and health care. Another impact will be further weakening of the currency, he adds.

“Whether we like it or not South Africa is part of the global village, given that our imports far exceed our exports. What the global village thinks of us as a country is reflected in the strength of our currency. What does this mean for the man in the street? As soon as the Rand weakens the cost of our imports such as fuel, machinery, technology, vehicles, plastics, grain and pharmaceuticals increases. The events over the past week have already caused the Rand to weaken, significantly increasing the cost of living for all consumers. A further weakening of the currency will make this worse impacting on the poor the most.”

He adds that one of the biggest casualties of the credit rating downgrade is likely to be small business and by implication employment. Small business (50 employees and less) is heavily dependent on economic growth, a stable currency and the cost of borrowing. Since between 65% and 70% of South Africans are employed by small businesses and 78% of all registered businesses in South Africa are owned by black South Africans, it will be the ordinary majority who will bear the brunt of this credit rating downgrade.

“Investments flow where there is rational decision making that impacts on policy certainty. Currently South Africa offers neither as was confirmed by Standard and Poor’s decision on Monday,” concludes Campher.

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