What the downgrades mean for Johannesburg and its economy
Ratings downgrades always negatively affect the ‘common man’, seldom the ‘ignorant elite’ who effected them
SA was already well on its way to junk status, as the political risk associated with the country deepened — this was clear in its credit default swaps, which were at the same levels as countries with junk bonds, such as Brazil, Turkey and Russia.
While political developments were the immediate catalyst for the downgrades by S&P and Fitch, weak economic growth was also an important factor. International Monetary Fund data indicate that SA barely grew in 2016 — just 0.1%. S&P’s own data is little better, showing 0.6% growth in 2016, a revision of its 1.6% forecast published in December 2015.
Brazil and Russia had their S&P rating cut to junk after their economies stopped growing. When Russia was downgraded in January 2015 its GDP had shown a contraction of 2.8%. Similarly, when Brazil’s rating was cut in December 2015, its GDP had contracted by 1.5%. And the political travails of Brazil demonstrate the extent to which political risk affects the economic risk of a developing economy.
Against the backdrop of weak output, SA’s government debt increased to about 45% of GDP in 2015 from about 30% in 2010. This is an indicator of aggressive borrowing, and with the talk of nuclear energy investment being revived, the indications are that public debt will only go up.
In the same vein, the adoption by President Jacob Zuma and new Finance Minister Malusi Gigaba of the populist slogan "radical economic transformation" will simply accelerate the growth of public debt in an economy that is barely growing. In terms of a rating method of assessment through the cycle, Zuma’s poor leadership has succeeded in crippling the country.
Irrefutably, the ratings downgrade poses existential risks for Johannesburg’s economy, and this is likely to be in the form of reduction in foreign portfolio investment, disinvestment, an increase in unemployment, surging inflation and a lack of economic growth.
This will bring untold suffering to the residents of the city from Soweto to Alexandra and Orange Farm, to the Winnie Mandela informal settlement, and Sandton.
The JSE is a respected mid-tier financial market. The local bourse routinely registers more than a million trades in a day on the equity market, but this is likely to decelerate. The loss of sovereign investment grading will deter portfolio investors largely due to uncertainty, resulting in a decline of foreign currency inflows into the economy.
As our economic woes deepen, an increasing number of companies will seek opportunities beyond the beleaguered city. Analysis of other cities that faced migration after negative ratings — such as Harare, Caracas and Sao Paulo — shows that a move away from a favourable economic profile led to disinvestment, especially by international companies. International companies disinvest as it becomes increasingly difficult to post profits. Often this is due to a deterioration of the investment environment, particularly the weakening of the local currency, which drives up the cost of doing business.
Johannesburg is the regional corporate home to many international business organisations. The negative rating migration will likely trigger disinvestment from the city’s economy. Divestment from Johannesburg will have a negative impact on the labour market, exploding the unemployment rate of the city, which is already at 33%.
Many people from around SA, and others from international environs, relocate to Johannesburg in search of work. In an environment where companies are disinvesting, there will be very little prospect of them finding gainful employment. This underlines the fact that sovereign junk status is devastating to the common man, although it can have negligible effect on the ignorant elite who caused the problem in the first place.
The downgrading of SA has been accompanied by the weakening of the rand. It slumped 2% immediately after the announcement of the sovereign credit downgrade. Currency prospects are negative. Rising inflation, as a result of the weak currency, will make the cost of living very expensive for the citizens of the city, and this will manifest in the cost of food, fuel and imports of goods, as well as industrial inputs. Invariably, the citizens of the city will be stricken by economic stagnation and rising prices, and their confluence will leave people with less disposable income.
With low earnings — and, in many instances, no source of income due to unemployment — rate payers will increasingly default on their municipal accounts, and this will negatively affect the fiscal metrics of Johannesburg.
SA’s economy is on the brink of an abyss, and while John Maynard Keynes’s famous words apply — "In the long run we are all dead" — economic history offers us solutions to improve our quality of life before that day comes.
Germany’s economy was brought to its knees by the ill-conceived decisions of the Hitler dictatorship, but a subsequent change in government and political ideology brought reconstruction and aggressive economic growth.
In similar fashion, in the mid-20th century, the Japanese economy was weakened by the consequences of the ill-conceived public policies of Prime Minister Hideki Tojo. Its downfall spawned a better and more savvy administration, and new resolve to improve the economy. It created a ministry of international trade and industry whose developmental exploits remain the envy of the developing world today.
The solution to SA’s current political and economic existential crisis lies in the removal of Zuma from the presidential office and the adoption of prudential economic and finance management. If this happens, Johannesburg will continue to be a beacon of hope and economic growth for the whole African continent.
• Prof Dagada is the Johannesburg mayoral committee member for finance