The latest sovereign ratings downgrades imposed on South Africa have dealt a blow to the country's economic recovery plan and should spur government into action to address the issues raised by Moody’s and Fitch.
Responding to the news that Moody's and Fitch have pushed South Africa's credit rating deeper into junk status, Business Unity South Africa (Busa) CEO Cas Coovadia said in a statement at the weekend that the downgrades reinforced the "severe socioeconomic crisis confronting the country".
" . . . [this] should impress on all stakeholders the urgency with which clear, hard decisions need to be taken."
North West University Business School economist Professor Raymond Parsons commented that, while expected, the decisions by the ratings agencies were not good news for the economy and that it highlighted the urgent need for South Africa to change its economic narrative.
The Moody's downgrade places South Africa two notches into junk status, while the Fitch downgrade places the country three notches below junk status. Fitch downgraded South Africa’s long term foreign and local currency debt ratings to ‘BB-‘ from ‘BB’, while maintaining a negative outlook. Moody’s downgraded South Africa’s long term foreign and local currency debt ratings to ‘Ba2’ from ‘Ba1’, also maintaining a negative outlook.
Although Standard and Poor’s (S&P's) has kept its investment outlook as neutral, Parsons pointed out that, overall, this was South Africa’s “worst rating ever” from the big three rating agencies since 1994.
Busa urged government to implement short-term deliverables, while tabling credible and properly resourced plans for longer term interventions.
Particularly, Busa believes South Africa must address its low levels of productivity, exercise wage restraint, improve the ease of doing business and competitiveness, while dealing with the ongoing challenge of financially weak State-owned enterprises (SOEs) that are not fit for purpose.
“In all of these areas business stands ready to support the necessary actions. However, we firmly believe we do not have to continue discussions on what needs to be done.
“Social partners, including government, have identified immediately implementable areas. These fall primarily in the ambit of government to implement and business has offered capacity to assist wherever the situation requires. Business is also committed to invest if long standing and repeatedly identified structural economic reforms are put in place,” Coovadia said.
Meanwhile, Business Leadership South Africa CEO Busi Mavuso stated that the ratings were a blow to the credibility of the Economic Reconstruction and Recovery Plan, with the agencies effectively saying they did not believe it would work.
BLSA and Busa both said that implementation is what matters now.
Mavuso noted that the structural reforms the country had been hammering on about had been needed for years and that it was the only way the country could provide an impetus to the private sector to boost investment, given that fiscal stimulus was not an option.
“But the other implementation we have to deliver on is restraining public expenditure. These downgrades are going to hurt, making it more expensive for government to borrow. Government cannot increase spending, but it can ensure that spending delivers more to the economy by shifting it out of consumption and into investment.
“That means public sector wages are one of the key areas for restraint, as well as no more bailouts for SOEs.”
Mavuso pointed out that the public sector had to adjust to the fact that the South African economy was smaller than it was and that it did not have the financial muscle to borrow any more.
“To try and continue with business as usual will be to continue pushing against economic reality. It will lead to more downgrades and eventual collapse when our funders say, ‘no more’”.
National Treasury in a response statement to the downgrades acknowledged that the downgrade would have immediate implications for the country’s borrowing costs, as well as constrain its fiscal framework.
Finance Minister Tito Mboweni said that there was urgent need for government and its social partners to work together to ensure that the sanctity of the fiscal framework was kept, and that much-needed structural economic reforms were implemented to avoid further harm to the sovereign rating.