This credit rating turbulence is temporary

If South Africa plays its policy cards right, it could emerge out of the current economic slump and string of credit rating downgrades much stronger in the long run, writes WESLEY SEALE

Desmond Tutu tells the story of a flight he took in Nigeria during the 70s when he realised, before take-off, that the pilot and co-pilot were black. A rarity in South Africa at the time; a rarity even today. He relays that he and his South African companions were quite chuffed with the idea of black pilots at the helm, until of course the flight hit its first bit of turbulence. Devastatingly and disappointingly, recalls Tutu, the first thought that went through his mind: will these black pilots be able to handle it? Apartheid had damaged us that badly. 

Our economy hit a bit of turbulence this past year and ratings agency Moody’s is now the latest to downgrade our sovereign credit rating. Again, we are made to believe that our black government will not be able to handle it. When faced with any turbulence, it’s best to gain perspective and allow the cabin crew and cockpit to take care of things. Not so, suggests some of our fellow travellers. They suggest instead that we march, protest and even insist that the flight be brought to a halt.

Yet is it naïve to think that we have simply hit a bit of turbulence? A credit rating agency, Standard & Poor’s has downgraded our flight to junk status. They have suggested that our airline carrier is not necessarily the best but they have not grounded us altogether. Other credit rating agencies may soon follow but those who have studied the impact of credit rating agencies and their ratings on national political economies, know that credit rating agencies are not without fault either. 

It is they after all who could be held responsible for the 2008 global economic crash. Interestingly, a credit rating agency based in China, Dogang, though said to be usually operating almost exclusively in China, the world’s largest economy, rated South Africa at A minus.

Therefore, as a country with ‘junk’ status, that is BB plus according to Standard & Poor’s, it is useful to look to other countries who are in the same status in the neighbourhood.  

Our African neighbours, especially the larger economies, are rated lower than South Africa except for Botswana which has an A minus rating. Nigeria and Angola, for example, are both rated B while Kenya gets a B plus and Egypt a B minus. Our partners in BRICS though tell a different story. China is rated AA minus, with a negative outlook, India has a BBB minus rating, with a stable outlook, and Brazil is the only country in the group rated lower than South Africa at BB and also with a negative outlook. Brazil’s political decisions and challenges could be attributed to this rating. 

Notable economies also currently ranked as ‘junk’ include the other BRICS country Russia together with countries such as Portugal, Cyprus and Indonesia. Yet both Russia and Indonesia have a positive outlook whereas Portugal is rated as having a ‘stable’ outlook. Another emerging economy, Turkey is on a lower status at BB. While some may attribute the rating of both Russia and Turkey to their political challenges, it is critical to understand that the structures of their economies remain able to absorb inclusive growth; hence a positive outlook especially in the case of Russia.

As we have said, perspective remains key. The gross domestic product per capita of countries such as Portugal and Cyprus is nearly five times that of South Africa’s. In 2016, GDP per capita for Portugal and Cyrpus was in the region of USD 25 000 to 26 000. South Africa’s was sitting near USD 6 000. These figures give us an idea about the strength of the economies in relation to the national population. 

However, a country whose GDP per capita does come close to that of South Africa’s is Indonesia. This country’s GDP per capita in 2016 was just over USD 9 000. Again, measuring and then comparing economies is a complex exercise. Indonesia, after all, is South East Asia’s largest economy whereas its population is nearly five times the size of South Africa’s. 

Yet that Indonesia’s credit rating status, by the same rating agency, is also at junk status makes it interesting. The outlook of the rating is ‘positive’ though and so the question becomes: can South Africa learn from the Indonesian experience and why Indonesia?

A critical element of credit ratings is outlook. Credit ratings predict whether an institution or government is able to honour its payments in the future. At the heart of financialisation is the outlook on whether an institution or country is positive or negative. 

Indonesia’s outlook is positive. A recent report by PwC suggested that in 2050, Indonesia would be the world’s fourth largest economy; after China, India and the United States. Brazil and Russia are ranked fifth and sixth respectively. 

The same report suggests that South Africa would rank 27 out of the top 32 global economies in 2050. An economy that will be as large as 2.5 trillion US Dollars, measured in projected global domestic product through purchasing power parity, South Africa would be above developed countries such as the Australia, Poland and the Netherlands as well as Latin American powerhouses Colombia and Argentina. Nigeria and Egypt will however top us; being placed 14th and 15th respectively. Our average growth between now and then would be around 3.7 percent, the same as Indonesia.

The report suggests a number of elements that those charged with public policy should concentrate on. Of those, it would be useful to point out two: population and inequality.  

A number of countries with a high population have been able to reap the benefits of a population dividend. Long gone is the notion that low populations are better, instead emerging economies such as China, India, Brazil and Turkey have been able to capitalise on their high populations. Nigeria, Pakistan and Indonesia, suggests PwC, are on a path to economic strength because of their populations. Africa’s population of nearly a billion people therefore poses an opportunity for the continent.

Yet high populations, cautions PwC, must be matched with skills development and life-long learning so as to equip an ageing economy. Special attention should be paid by policymakers to empowering women who often have to care for households while maintaining a job at the same  time. The Report by PwC continues to encourage generous leave allowances, affordable childcare and tougher legislation on gender discrimination. In South Africa, many women continue to earn less, for the same job, than their male counterparts.

Inequality must be addressed, suggests the PwC Report. Given that South Africa is one of the most unequal societies in the world, it is important to note that the report says that in order to tackle inequality, investment must go into education and social welfare. It is only through direct investment in education and skills development that “making access more equal” becomes possible. The #FeesMustFall campaign for free higher education for the poor is an example of how development could be unlocked through education. 

Needless to mention that Indonesians have their land.

Any radical economic transformation that does not include addressing inequality and making provisions for population development undermines South Africa’s ability to become one of the top global economies. The apartheid economy that we have inherited and that has hitherto been protected, must be restructured in order to unlock inclusive growth and investment. 

Liberal outlooks have made us to believe, for instance, that labour laws hamper growth. PwC suggests the exact opposite. It promotes more leave, more company responsibilities for skills development for young and old and more public spending on education. 

The current credit rating must be seen as all bouts of turbulence are – temporary. Yet what is important is that serious attention be given to restructuring the economy by our pilot in our cockpit called the Union Buildings.

Seale 

Teachers Politics at Rhodes University 

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