Credit ratings and such: What SA did/didn’t do that got us here, context

So Fitch decided not to downgrade… Along with those other two.

How did we (South Africa) even get here?

2016 in South Africa.

South Africa faces its toughest political and economic year since 1994. Both global and domestic factors are conspiring to test the country’s policy makers in a desperate effort to reboot the weakening economy. Public and private South African sectors have been somewhat forced into what is often called a ‘teambuilding exercise’ to ensure that the economy isn’t downgraded by American credit rating agencies; Moody’s, then the S&P and finally Fitch. The risk of a recession is also looming within the country, this, and the threat of a downgrade has prompted many citizens and economists of South Africa to reflect on what the country may have done wrong over the years; poor policy choices being one of the most cited reasons.

If policy choices affect the South African economy negatively or positively is debatable. The extent to which our past and current policy introductions played a role in harming our economy is an unknown. This we need to talk about.

Rating agencies have highlighted the lack of a growth model in South Africa, it is now clear that households are too indebted to spur domestic, consumption-led growth. And as a result of the downgrade scares, companies which operate internationally have implemented functions that would reduce the impact of these downgrades on their organisations, such a company is South African banking giant Nedbank (JSE:NBK) which is currently being separated from its parent company Old Mutual plc (LON:OML) which has a secondary listing on the London Stock Exchange (LSE). Old Mutual is separating its four core business units in a bid to cut millions in costs, it will also reduce its stake in majority-owned Nedbank to a minority position. The downgrade would affect Nedbank’s share price on the LSE, hence the split.

Developing African economies which have relied on the export of minerals are seeing their growth rates falter, South Africa is no exception.

Anglo America (LON:AAL) has moved its headquarters out of South Africa to London and has also separated their South African operations from main company Anglo America in order to hedge what has become the South African risk of share devaluation. Year on year, the mining sector is one of the highest contributors to the country’s GDP, hence when industry giants such as Anglo America choose to cut their losses and become less active within South Africa, the country takes a huge knock which, amongst other things, results in a weaker currency. This crippling of the economy can be traced back to mine worker strikes throughout South Africa for higher wages with the backing of labour unions which implement labour laws. It has become clear to South Africans that export growth requires diversifying beyond raw materials.

Unemployment rates in the 25% range have barely moved since the year of democracy. As the economy weakens, lower income earning families demand more subsidies from the government of which government provides by increased social grant and housing expenditure.

The fall in oil prices, together with a more volatile China, presents a near perfect storm for South Africa in terms of external risks to the economy, add to this other global risks – including flagging emerging market growth, a decline in the fortunes of key Brics members like Russia and Brazil, and rising US interest rates – and you have an unstable global picture playing havoc with many developing nations.

South Africa’s GDP today is weaker than the global average and at least three times weaker than that of sub-Saharan Africa; the under-performance of the South African economy compared to the global average highlights the country’s inability to keep pace with global economic trends.

Yet, it is argued that a series of ‘own goals’ has also contributed to the current economic malaise, questionable policy choices by the South African government have also created a climate of uncertainty amongst stakeholders.