Since “Nenegate”, the country has been fixated on avoiding being reduced to junk status by ratings agencies. Three agencies control 95% of the market and with Moody’s we are two notches above junk but with Fitch and with Standard and Poor’s, South Africa is just one notch above junk status.
Being downgraded to junk will force up the cost of borrowing (debt financing is the fastest growing expense in our national budget) and will see another slide in the currency. This is because most foreign institutions are not allowed to buy or hold government debt if the country has junk status. So, if we are downgraded to junk status, foreign institutions will offload our bonds resulting in a sizeable depreciation of the currency. To borrow additional funds will mean paying higher interest to attract investors.
How do we avoid being downgraded to junk status?
It has been generally accepted that control of our budget deficit plus a return to economic growth are the things ratings agencies are looking for. Whilst they are looking at these factors, Moody’s raised another factor they consider to be important and that is the health of the nation’s institutions.
It is not just the obvious ones like Eskom, the Treasury and the Reserve Bank but ratings agencies also take an interest in the Office of the Public Protector and the Constitutional Court. They see the smooth functioning of these institutions as an essential underpinning of economic long term health.
Equally important are the efforts by Minister Gordhan to create effective working cooperation between government and business to implement measures to avoid being categorised to junk status.
Institutions like the Public Protector ensure democracy is vibrant and working. They keep a check on corruption (or at least ensure it is exposed and remedied) and protect fundamental rights (like property rights). The breakdown of these institutions has a close correlation with economic recessions or worse. Zimbabwe is a good example of this.
Assessing the risk
So when you are trying to analyse whether we are headed for junk status consider more than our economic outlook – see if the Public Protector’s findings are being followed, the laws of the country are being enforced and government and business work effectively together.