Even with ratings agency Moody’s saying they will review South Africa only in the next month or two instead of on Friday, the country is still likely to be downgraded by all rating agencies. This is the view of economist Mike Schüssler.
On Monday night ratings agency S&P made an earlier than expected move and downgraded SA’s foreign currency debt to “junk status”.
“The economic pressure is starting to show in, not only elections, but in the ruling party as politicians feel the pressure from lower growth and lots of broken promises,” explained Schüssler.
“The broken promises are going to hurt government at the polls, but the rise of the ultra-left and ‘nonsensical populists’ is worrying not only rating agencies, but fund managers and business already in the country.”
He pointed out that business is not at fault for the lack of jobs created and the return on investment in South African operations is on average lower than the return offered in a bank account. So business is divesting just as SA needs it to create jobs.
Declining growth and especially the fact that in the last few years SA has seen its income per capita drop below that of the world average, are among the reasons Schüssler gives for his prediction of a likely downgrade by the other ratings agencies as well.
Chinese richer than South Africans
“South Africans used to have an income that was 110% that of the world, but by 2015 they were only 84% of the income of a global citizen. The Chinese are richer than South Africans now and we have dropped to 116th place in the global rankings income per person rankings. This is at Purchase Power Parity rates and via the two most accepted and common used methods,” explained Schüssler.
“South Africa told its citizens and investors that our government debt would not go over 38% of gross domestic product (GDP), followed by 40%, but now – a few years later – SA has a debt to GDP ratio of over 50% and with guarantees to state-owned companies are over 55%.”
Government debt continues to increase faster than GDP and thus is still growing. The paying back of debt is the fastest growing item of government expenditure.
Paying back the money
“While our debt is below the world average, our income is also below average and with our government expenditure there is less room for paying back the debt, making us more likely to suffer problems paying back the money,” said Schüssler.
Perceived corruption in SA is another reason mentioned by Schüssler.
“The corruption in SA is perceived to be very high and that the top political leadership will do anything to defend their sources of revenue, including firing ministers. The political musical chairs have probably hastened the downgrade as good growth is now seen as less likely,” he added.
“Investors are getting worried that much of government debt and debt guarantees are done for useless expenditure and companies that will never pay back. For example, there still is no CEO at SAA even if this was promised by end of March – as little as 10 days ago. People are worried the losses are likely to continue and government will keep paying or providing guarantees.”
In Schüssler’s view, the last downgrade was simply due to the uncertainty of policies and commitments made by more experienced finance ministers. It is also seen as cover for a political takeover of Treasury.
“We need Treasury to function in a very technical sense and not be run by personal interests. This is not just my view, but the view of many in business as well as fund managers,” said Schüssler.
The politics of greed
“While all the above negative factors are the broad trends without which the downgrades would not have started to happen, the politics of greed are such that they alone could have caused a downgrade on their own. Business people are worried and the phones to analysts and bankers have been very busy while the bankers also feel uncertain. Nobody is making any decision right now, which just delays any activity and growth in the economy.”
Schüssler said broken promises are also mentioned when talking to decision makers and the fact that tenders are often not given on either price or merit.
“This micro uncertainty is also not helpful and has come to the attention of at least some rating agencies,” said Schüssler.