The buoyancy of the aftermath of the Bok Rugby World Cup win and the approach of the holiday season has masked the impact of three reports which, together, are a downer for the economy.
Moody’s moved the outlook on South Africa’s rating from stable to negative on the eve of the magnificent game, muting attention away from the impacts.
But then S&P revised its outlook on South Africa from stable to negative. The two became three, a terrible triplet of economic reports - when the International Monetary Fund’s Article 1V annual assessment came out on November 25.
"A more decisive approach to reform is urgently needed. Impediments to growth have to be removed, vulnerabilities addressed, and policy buffers rebuilt. Expediting structural reform implementation is the only way to sustainably boost private investment and inclusion."
If you add Financial Stability Review, released by the SA Reserve Bank last week, it makes for a quad of reports all yelling a loud message that the economy is sinking like the Titanic.
Yawning debt; anaemic growth; crippled SOEs
Each of the reports creates a consensus of what the problems are: growth and growth prospects are incredibly low. The reports now have a consensus growth rate for 2019 from one percent pencilled in with limited potential of two percent – the latter is looking very unlikely.
Then, all four reports point to "fiscal deterioration" as a twin factor – the government is spending at a rate that revenues cannot catch up with.
Revenue collection repeatedly misses the target. Debt to GDP figures are in a frightening territory (anywhere from 67.7% to over 80% of GDP if SOE debt is rolled into the number) while the deficit is now slated to grow to 6.2% of GDP.
None of this is new, as the sobering medium-term budget policy statement in October painted the picture, but the successive confirmation in three international reports is sobering.
"A rating upgrade is very unlikely in the near future," said the Moody’s statement.
S&P, a more hawkish agency, said: "We could lower the ratings [even further into junk] if we were to observe continued fiscal deterioration, for example, due to higher pressure on spending, rising interest costs, or the crystallisation of contingent liabilities in relation to SOEs."
This week’s Eskom results (the utility has projected an R20bn loss in 2020), with SAA hitting the tarmac as a going concern this week, meaning that pressure on spending will be acute.
Meanwhile Numsa and the SA Cabin Crew Association’s win of a 5.9% salary increase at the airline could mean that moderation of the state wage bill is unlikely. Government wage negotiators baked in above-inflation increases for public servants until 2021 as part of a three-year wage increase deal.
"As a result, the scope for spending restraint is mainly in relation to purchases of goods and services (15% of total government spending) and a reduction in headcount numbers in the public sector, most likely through natural attrition."
SARB sets out the impacts
In its Financial Stability Review released this week, the SARB lists a high likelihood for deteriorating debt dynamics; weak growth and revenue under-collection; fragile SOE’s and an escalating public sector wage bill, as well as debt costs so high they crowd out other vital expenditure (which Moody’s, in turn, noted was the only place likely for cuts).
Then, the SARB lists a litany of highly likelihood impacts. These are higher taxes, lower incomes and investment, sovereign credit ratings downgrades triggering capital outflows, an increase in financing costs and a protracted period of low economic growth. It’s not a pretty picture. But all of this is well-known (except perhaps to Numsa boss Irvin Jim and his negotiators).
What is striking about the three external reports (SARB does not do politics) is the loss of trust they reflect on whether Ramaphosa can carry through his government’s reform programme. For a period after being elected ANC president in December 2017 and being inaugurated as South African president in February 2018, Ramaphosa enjoyed headwinds of change and high trust in his ability to deliver economic reform. But that has melted like an ice-cream in a Gauteng heatwave.
Can the government reform the economy?
A low-growth economy means that high inequality is not shifting and "resistance to reforms from key stakeholders limit the government’s room to adopt and implement structural reforms," says Moody’s. "In the last two years, it has become increasingly apparent that those constraints are challenging the government’s ability to implement reforms that would durably lift growth, to an even greater extent than previously expected.
And here is the crunch: "The government has promoted a number of initiatives in response to these long-diagnosed issues. However, its ability to implement those initiatives in a way which generates broadly-based sustainable growth has faced obstacles in part from outstanding vested interests, in part from the social and political challenge of imposing measures that are initially likely to be detrimental for parts of the population."
The report says that while the mining charter has been passed, it has not created certainty for investors. While there are innovative youth employment schemes, "none (is) on a scale likely to materially increase employment". And it adds, "Other politically and socially sensitive reforms such as land reform have seen slow progress…".
For S&P, "Factional disagreements within the ruling ANC party threaten the reform momentum crucial for kick-starting growth." In other words, Ramaphosa’s reform programme is being stymied by his own party. The IMF report uses adjectives like "subdued", "muted" and "vulnerable" to describe the South African economy.
Then, it fires a pretty straight arrow at Ramaphosa: "A more decisive approach to reform is urgently needed. Impediments to growth have to be removed, vulnerabilities addressed, and policy buffers rebuilt. Expediting structural reform implementation is the only way to sustainably boost private investment and inclusion."
The SARB has modelled for a Moody’s downgrade next February which will take South Africa into "junk" or a full sub-investment grade rating. The models suggest a capital outflow of between US$5bn to US$8bn although the bank says it’s very difficult to predict outcomes.