S&P’s assessment of the country’s Covid support package is faulty
Ratings agency worries about SA’s debt, but a one-off health and economic shock calls for stimulus measures
The unprecedented economic impact of coronavirus-induced lockdowns has necessitated that governments support their economies. SA recently announced a R500bn fiscal support package to mitigate the adverse health and economic consequences of the Covid-19 pandemic.
S&P Global Ratings, one of the dominant international ratings agencies, does not seem impressed with the government’s expansionary fiscal policy stance. The ratings agency recently reaffirmed the country’s long-term foreign-currency rating at BB-, three notches below investment grade, with a stable outlook. It warned, however, that SA’s coronavirus stimulus package could widen the country’s debt burden to unsustainable levels and weaken the economy. This implies the ratings agency’s next action is likely to be negative. In our opinion this is a faulty assessment of the country’s risk profile. This is why.
In a crisis it is a norm that governments introduce stimulus packages to counter the impact of the crisis, boost spending, increase demand, increase employment, increase income and save the economy from a crisis. By introducing a stimulus package SA has not done anything out of the ordinary. Countries have implemented these countercyclical fiscal policy measures to address the drag on an economy emerging from slower domestic activity and lower global demand. Under these conditions debt is of little to no concern.
In addition, a huge chunk of the stimulus package — about R400bn — is being spent on protecting jobs, creating employment and assisting business enterprises. This is productive expenditure whose net economic output is beneficial to the government, and the economic stimulus programme repays itself through benefits to the larger economy.
The stimulus package is funded by reallocating expenditure in the current budget and other low-interest options through institutions such as the Unemployment Insurance Fund (UIF), the New Development Bank, the World Bank and the International Monetary Fund.
Ratings agencies have been criticised for influencing domestic policy direction. Historical trends show ratings agencies prefer countries that implement austerity measures. In the majority of the risk factors in their methodology, ratings agencies emphasise fiscal consolidation, efforts to reduce debt and decrease spending. These rating indicators are austerity-orientated, aimed at reducing government budget deficits through spending cuts and tax increases during a crisis. This is a “handbag” economics policy proven not to work at government level. They portray a message that austerity leads to higher ratings, a policy direction they recommend to all countries in their rating reports.
We argue this is a one-off public health and economic shock and should be treated as such. It is paramount that countries deploy fiscal and monetary tools to limit the spread of the disease and reactivate the halt in economic activities. Debt suitability should be of secondary concern at this point. The policy recommendation from international development financial institutions affirms this view. Therefore, S&P’s risk-assessment methodology is misguided and the deterioration in the country’s fiscal capacities to face the crisis is extraordinary and temporary.
The popular myth is that it is government overspending that leads to high debt levels, a widening deficit and crowding out of the private sector. This is incorrect. In contrast to this myth, high public debt is often a direct result of government bailouts, guarantees and contingencies to either state-owned entities or private businesses, to rescue them from bankruptcy. Another driver of debt is inefficiency in revenue collection by the tax collection agency.
Cutting government spending is dangerously self-defeating as it often worsens the public debt level and budget deficit problem that it attempts to solve. In simple terms, it is the sum of government spending and private spending that makes up an economy’s total investment. Low government spending translates to lower levels of economic growth, high unemployment and a decrease in tax generation, making the debt and deficit even worse.
A Cambridge economist, Ha-Joon Chang, likened the cutting of a government budget in a time of crisis to “digging oneself deeper into a hole”.
While it is incorrect for the ratings agencies to criticise the government’s stimulus response package to the coronavirus crisis, there is a need to reconfigure the rating indicators from the traditional austerity-based risk factors. The following variables should be considered in rating models instead:
- As proven in history, the capacity of the government to address deficit and debt problems should be measured by how it manages to create more and better-paying jobs.
- Rather than discouraging economic stimulus policies, which are a necessity in Africa’s emerging economies, rating indicators should instead encourage effective investment in human and productive assets that battles inequalities, at the same time driving economic growth.
- The effectiveness of monetary policies and fiscal policies should be measured based on their capacity to simultaneously build long-lasting social and economic assets while also stimulating spending in the low- and middle-income brackets, which have a higher propensity to spend than the higher-income earners. This will result in increasing tax revenues from economic growth that can be used to pay off deficits and public debt in the medium term.
There is a need for the government to increase fiscal space to generate domestic revenue, increase the level of economic diversification and build resilience so the economy can bounce back to a positive growth trajectory.
• Mutize is a postdoctoral researcher at the University of Cape Town’s Graduate School of Business. Tefera is an economist working with the African Peer Review Mechanism in Johannesburg.