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Feeling blue? International rating agency downgrades South Africa

14 November 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

South Africa’s financial institutions survived the global credit meltdown of 2008/9 far better than their international peers. And in the years following the crisis our financial industry has been hard at work to put checks and balances in place to guard

It sounds like National Treasury and the Department of Finance are doing a stand up job. So it was quite disconcerting to learn this week that Moody’s Investors Service had changed the outlook on our A3 local and foreign currency government debt ratings from stable to negative. In layman’s terms: They have less confidence in government’s ability to honour its debt obligations over the medium term... According to media agency I-Net Bridge the investor community (as reflected by the ratings agency) is “concerned about heightened political risk in the context of more constrained public finances.” Is this a storm in a teacup? And do we really deserve a downgrade given the apparent soundness of our national finances?

Perhaps the agency is off mark this time

Moody’s explains: “The primary driver behind the decision to change the outlook on South Africa’s government ratings to negative is the rising pressure from society at large, as well as from within the African National Congress (ANC) and its political partners, to ease fiscal policy in order to address South Africa’s high levels of poverty and unemployment.” It seems the agency is responding to the recent ANC Youth League “economic freedom” march to the JSE and Union Buildings. We would be surprised, however, if they equated this march – said to comprise as few as 2 000 and as many as 25 000 disenfranchised youth – to the significant “Arab Spring” uprisings in North Africa and the Middle East.

Is government likely to yield to pressure to reduce the gap between rich and poor? They showed no signs of cracking when Finance Minister Pravin Gordhan presented the Medium Term Budget Policy Statement recently. If anything it was as prudent and disciplined as ever. The budget deficit came in at 5.5% of GDP for 2011/12 declining to just 3.3% by 2014/15. And debt seems manageable too, with the consolidated public sector borrowing requirement coming in at 8.1% of GDP this year versus 5% in 2014/15. The only hiccup is that government debt will rise from 23% of GDP in 2009 to about 40% by 2015. It sounds worse than it is when we consider that most of the developed world is sitting with debt levels way in excess of 50% at present. Greece’s debt ratio topped 140% at the height of the sovereign debt crisis.

We are not sure South Africa will succumb to popular stirrings to undo our disciplined fiscal controls. Treasury and the finance ministry have steered the economy through numerous ructions, including the bumpy transition from ex-President Mbeki to current incumbent Jacob Zuma. And there’s no reason to think the current manoeuvrings will have a different outcome.

The real problem is growth

The second concern raised by the ratings agency is that South Africa’s GDP growth will be slower than anticipated – creeping forward in the 3% to 3.5% band over the next five years. This rate of economic growth will certainly be too slow to tackle issues such as unemployment and the social tensions that go with it. Unfortunately this problem extends beyond our borders to the world in general. Things are so bad that the head of the International Monetary Fund (IMF), Christine Lagarde, has warned that the ongoing European debt crisis could result in a “lost decade” for the global economy. Her speech to a financial forum in Beijing was littered with words and phrases such as “dangerous”, “uncertain” and “clouds on the horizon”! She hasn’t painted a rosy picture.

How to chase foreign investors away

The third reason the ratings agency offered for its decision to downgrade was the apparent unwillingness of the country’s leaders to “ definitively reject demands from certain segments of the political spectrum for more activist policy interventions” They said interventionist calls (for nationalisation, for example) would negatively impact on private investment. Rather than address poverty such steps would frighten international capital from our shores and result in all local factors of production streaming from the country.

It seems there are tough times ahead. The agency concludes: “Overall, Moody’s believes that the next two years will be especially challenging for South Africa’s political system, with the potential for further pressures emerging for the established economic policy framework during this period.” The good news, our overall A3 rating is still warranted due to our effective economic stewardship over the past decade.

Editor’s thoughts: Balancing the country’s tax revenue with expenditure becomes tricky during times of economic stagnation. Provided we grow at 3.5% per annum we should be able to maintain the status quo – but the gap between rich and poor will remain. Can South Africa alleviate poverty and wage inequality without taking on massive debt? Please add your comment below, or send it to


Added by Michael, 15 Nov 2011
This is quite funny. The guys who did not see it coming are now putting measures in place to prevent a similiar meltdown? Funny, funny. Did not see the beast the first time, but will get to see it the second time? I am sure this is an article from April 1. More regulations? Regulations adds costs to production- it does not lessen it. Silly economics. How about we get government out of business, encourage individiuals / corporates to save and then invest such savings in being productive, i.e. make stuff and sell it at a profit. Clowns...
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Added by Cynical Simon., 14 Nov 2011
The question is not whether Moodeys got it wrong or right.The results will be unpleasant if not catastrophic and the answer is in the hands of the ANC Government who excels in paying guessing games,saying one thing and doing another.They all want nationalisation of mines and illegal land grab;the Government enjoys listening to Malemas demands as ultimately these are their own.
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