Credit ratings agencies rate a debtor’s ability to pay back debt. In the global bond market, the agencies provide an independent evaluation of debt securities issued by governments and by corporations such as Eskom. The better a country’s rating, the more attractive it is to lenders and investors.
In the period between the advent of democracy in South Africa in 1994 and the mid-2010s, sound macroeconomic management South Africa enjoy very good credit ratings. Over the past few years however, tightening economic circumstances combined with persistent low growth and revelations of endemic corruption have badly undermined our country’s creditworthiness.
This has seen the three big ratings agencies Standard & Poors, Fitch and Moody’s all downgrade their ratings for South Africa. The former two agencies no longer rate our debt as “investment grade” and only Moody’s has thus far resisted downgrading our sovereign debt to “junk” status. Just last week, the agency decided not to update its South Africa rating. In delaying doing so Moody’s may have just saved many South Africans from a lot of pain. In effect, they thrown us a lifeline that we must grab a hold of.
But why is this important? What does it mean for the ordinary person in the street?
Firstly, if all three big ratings agencies downgraded us to junk status, the cost for government of borrowing money would escalate significantly. At a time when the fiscus is under severe pressure, the resultant diversion of resources to repay debt would significantly erode governments ability to finance key social and economic expenditure. To the extent that this would in turn diminish government’s capacity to deliver services and promote economic growth this could be crippling probably leading to increase protest and declining social and economic stability.
Secondly, a downgrade to “junk” status would send a signal to investors that their investments might not be secure. Those that already here would begin to look to disinvest and those contemplating investing here would probably take their capital elsewhere instead. The disinvestment would see a relatively rapid outflow of capital which would dump large amounts of Rand on the currency market driving down the value of the currency and introducing another wave of inflation that would make it almost impossible for government to contain inflation below its stated targets. The impact of this on the poor would be severe.
But what to do? Well, the ratings agencies are rightly concerned about a number of challenges that we seem unable to address including: our deteriorating fiscal position; the prospects for a successful restructuring of Eskom and a variety of other State-owned enterprises; a very unproductive and bloated public service; a decline in the ease of doing business; and thus far, a failure by the President to display convincing leadership to break the corruption and economic growth logjams. Many structural reforms are called for. Most of these will be unpopular and some will undoubtedly meet strong resistance from various interest groups for a variety of reasons.
But as a society and as concerned citizens we have to find ways to apply the maximum pressure we can to make political office bearers and senior bureaucrats make the hard choices that need to be made. After all they are supposed to be our representatives. Not only do we need to get them to find ways to accelerate the perilously slow pace of economic reform, but we need them to recognise the potential damage that implementing populist demands for expropriating land without compensation and radical economic transformation – both stated concerns by the ratings agencies – could cause. Most of all however, we have to sort out Eskom and hold the corrupt and their corrupters accountable for their actions. A failure to make rapid progress on these two challenges will almost certainly seal the downgrading of our sovereign debt with the very serious social and economic consequences that this will bring.