The downgrade by S&P comes on the back of a highly charged political environment in the ruling ANC. This culminated in the sacking of finance minister Pravin Gordhan and his replacement with Malusi Gigaba. While the cabinet reshuffle is the proximate cause of the downgrade, South Africa’s political and institutional malaise goes deeper.
One hopes the credit downgrade could help to focus the mind of the country’s political leadership on the task at hand and that this will inject urgency for political change and economic reforms.
S&P's assessment contains a ray of hope: "We could revise the outlook to stable if we see political risk reduced and economic growth or fiscal outcomes strengthen compared to our baseline projections."
Piecemeal efforts towards change will not be enough. Bold leadership is required. But it’s inconceivable that the kind of action required can happen under President Jacob Zuma’s leadership.
The real chance to turn the country around is to do what the Brazilians did last year – impeach the president while building momentum in civil society to achieve political renewal as the basis for economic recovery.
South Africa failed to heed warning signs. For nearly a decade, global financial institutions and other international organisations have warned of a number of dangers. These include policy uncertainty, the consequences of low growth for social stability and the need to attend to industrial relations urgently.
South Africa experienced downgrades in 2012, 2013 and 2015. These should have been read as a harbinger of worse things to come. The government had ample time to draw lessons from these warnings but chose to stick its head in the sand. Meanwhile, the ruling party elevated factional battles above interest of the country.
South Africa could have drawn lessons from Brazil, which was downgraded to sub-investment grade status in 2015 in the wake of political unrest over a massive corruption scandal at the oil giant Petrobas, declining business confidence, growing policy uncertainty and President Dilma Rousseff’s weak leadership. The downgrade worsened Brazil’s growth outlook, with capital fleeing the country. Less than a year after the downgrade, the Senate had thrown Rousseff out of office.
In evaluating South Africa, S&P took into account the effectiveness of policymaking and stability of political institutions to respond effectively to socio-economic challenges and found them wanting. It singled out the risk of cabinet reshuffle for fiscal and growth outcomes, the possibility of increase in the contingent liabilities of the state and increased political risks in general in the current year.
The consequences of this downgrade are not difficult to discern. They will trigger a disposal by pension funds and other institutional investors of debt, since these funds are not allowed to hold sub-investment grade (or speculative) bonds. Sub-investment grade status will increase borrowing costs from global markets.
Interest rates are likely to go up, with debt-laden consumers bearing the brunt. Capital will flee.
Government spending will be constrained, including for welfare and public services, raising prospects of political unrest in the run-up to 2019 elections.
Further accentuating the strain on the economy is the fact that growth is likely to remain in the doldrums; with the employment outlook remaining bleak.
Export growth is projected to remain flat. As S&P notes, economic growth is unlikely to come from business investment, since business will be withholding capital in the face of political risk.
Bold political and economic reforms are urgently needed.
Zuma has already squandered his credibility and showed himself as out of kilter with the realities of the economy. The major task of pushing for structural reforms in the economy and restoring stability lies with the minister of finance who, ideally, should have relative autonomy from the president and be able to corral his cabinet colleagues to behave responsibly. Disappointingly, Gigaba started on a bad footing, peddling rhetoric and taking ambiguous and contradictory positions.
The government needs to send a strong message about the direction of economic policy. This must be followed by bold action to immediately restore confidence and gain private sector support. There’s also a need to restructure state-owned enterprises, improve efficiencies and restore good corporate governance.
Mzukisi Qobo is deputy chair: SA Research Chair on African Diplomacy and Foreign Policy, University of Johannesburg