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The South African Insurance Association (SAIA) adds its voice to concerns of a potential credit rating downgrade and the state of the economy

17 October 2016 SAIA

The South African short-term insurance industry says it supports efforts by the National Treasury, together with business and labour, to avoid a credit rating downgrade and to grow the country’s economy.

This is as Finance Minister, Pravin Gordhan, faces charges of fraud following the issuing of summons by the National Prosecuting Authority (NPA). The charges relate to allegations of an early retirement payment made to a senior executive of the South African Revenue Services (SARS), during Gordhan’s tenure as SARS Commissioner a decade ago. News of the summons saw the rand losing value against major currencies within hours of the announcement and negatively impacting the Johannesburg Stock Exchange (JSE) banking index. Gordhan’s summons comes amid fears of a potential credit rating downgrade in December.

The short-term insurance industry through its representative body, the South African Insurance Association (SAIA), has expressed concern over the latest developments. It says on face value the charges brought by the NPA seem to have little merit, however, the law must take its course. The SAIA calls that this matter is dealt with due care, integrity and urgency by all parties involved. The country’s economic growth relies on a stable National Treasury, whose leadership must be supported by all relevant stakeholders including government, business and labour. The SAIA says it supports all efforts by Minister Gordhan, the National Treasury and the financial sector at large to avoid a credit rating downgrade, and that any decision that may impact these efforts should be carefully considered.

As one of the major contributors to the economy, the short-term insurance industry not only manages risks by insuring assets and trade but is also a major employer in the financial sector, employing thousands directly and indirectly. Through paying claims, the industry provides work to many diverse businesses, including small and medium enterprises such as motor body repairers, plumbers, builders and engineering firms to name a few. This in addition to providing the funding through insurance, that allows industry to keep its doors open for business after suffering financial and other losses.

In the event of a credit rating downgrade, the rand would further deteriorate, thereby increasing the chances of interest rate hikes. Inflation will also rise and for the short-term insurance industry, this means that the costs of motor parts, which are mostly imported, will increase exponentially, which is likely to lead to increased premiums for policyholders or reduced cover. Short-term insurance products may therefore become less affordable, which could lead to consumers being exposed to financial risks in the event of a loss of or damage to assets. Furthermore, there could be reduced work for motor body repairers, the building industry and others, leading to potential job losses.

A credit rating downgrade would also have a negative impact on the economy in that there would be lower income tax to the fiscus as well as a prolonged period of negative growth with low investor confidence. This would adversely affect the objectives of the National Development Plan (NDP), which the industry is committed to contributing to through its various initiatives. Furthermore, confidence is being eroded in our critical institutions and economy, which leads to lower investment with the resultant negative effect on job creation.

In light of the above, the SAIA therefore urges all stakeholders to support the Minister of Finance and the National Treasury and to proactively work together towards ensuring a stable economic environment for all South Africans.

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