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Junk status – now it is up to each of us

Mar 18 2016 07:00
Nerina Visser
Nerina Visser, formerly head of beta solutions at

Nerina Visser, formerly head of beta solutions at Nedbank Capital, is a regular market commentator and director of etfSA.co.za. (Picture supplied)

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Ever since the momentous events of December last year, credit ratings agencies, and their view on the South African sovereign credit rating, have been receiving widespread attention.

In what has been seen as a significant change in the relationship between government and big business, these two parties have joined forces in a concerted effort to change the direction of the country’s financial and economic direction.

This has been evident from the urgent meetings behind the scenes in the aftermath of the firing of former finance minister Nhlanhla Nene, resulting in the (re)appointment of Pravin Gordhan to the role, to the topic dominating the State of the Nation Address (those were not our president’s words), culminating with the prudent and austere Budget delivered in Parliament at the end of February.

An appropriate focus on fiscal policy and even favourable rhetoric can lead to short-term optimism, but don’t be lulled into a state of complacency – unless we make some tough choices, we can expect to be downgraded to “junk status”, which has already happened with Brazil and Russia.

There are arguably three areas of the fiscus requiring urgent attention:

- Revenue must be boosted through a significant shift in economic growth;

- Fiscal discipline – controlling government spending – is non-negotiable; and

- The financing and ownership of state-owned enterprises (SOEs) need a major overhaul to reduce both the direct and indirect strain on the fiscus.

Gordhan has provided the roadmap to achieve the latter two, and it is now up to his colleagues in government to implement these in a decisive manner.

Credit ratings agencies and citizens alike are weary of talk that fails to translate into action. He has probably been successful in buying us some time by avoiding an immediate downgrade in June, but unless significant progress is made on the implementation of these plans, and a clear strategy is not presented to substantially increase our growth trajectory, a downgrade to sub-investment grade will be on the cards by December.

This “path of inevitability” stems from the metrics used to evaluate the credit worthiness of sovereign entities, and the impact of GDP growth as the denominator in most of these.

The mathematics of it is simple – as long as GDP growth declines or remains low, all these metrics will continue to creep higher, irrespective of what is done to the numerator (budget deficit, current account deficit, national debt, etc.).

Therefore, as important as it is to focus on the latter two issues, unless economic growth can be established on a much higher growth trajectory (at least 4% or more), the downgrade will be inevitable.

It can be argued that government has neither the political will nor the ability to implement the structural reforms required to change the country’s growth trajectory.

Positive recent developments have been the material shift in government’s attitude towards business, and the signs of increased co-operation between the public and private sectors. But what can you and I do to make a contribution to creating the future country we want and need?

It starts by acknowledging that each of us has the potential to make a contribution, no matter how big or small: buy locally manufactured goods and support small business with your patronage to help boost employment; invest in this country to build the future you want for your children; make use of the amnesty to come clean if you still have money offshore that has not been declared; eliminate corruption by being a whistle blower, and not contributing to it (yes, I’m talking to those who bribe traffic cops); make sure you are part of the solution, not the problem.

It’s time to decide where your loyalties lie – to continue feasting at the buffet of riches on offer in South Africa, while simultaneously hoarding wealth in foreign jurisdictions, is just immoral.

If you do not see a future amongst the enormous potential of this country and its people, then rather leave, for it is likely to get worse before it gets better. But if you decide to stay, then be prepared to commit fully, build, contribute, invest and help it grow.

To quote the late US President John F. Kennedy: “Ask not what your country can do for you, ask what you can do for your country.” As noted here, there is a lot to do!   

*Nerina Visser is director of etfSA.co.za and a CFA charterholder.

This article originally appeared in the 24 March 2016 edition of finweek. Buy and download the magazine here.

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