EDITORIAL: Fitch report is reason to panic
Agency’s forecast for the deficit is much larger than the government’s because of a weaker economy and extra spending on SOEs
Some South Africans still think that ratings agencies, tainted as they were by their failings in the lead-up to the global financial crisis a decade ago, shouldn’t be taken seriously. They also have ideological reasons for their aversion to the companies and respond with a not insignificant amount of disdain when others discuss government policies or economic performance with an eye on what the ratings companies’ response is likely to be.
Unfortunately, whether we like ratings agencies or not is irrelevant. The reality is that their pronouncements have an immediate effect on how bond investors perceive the country and how much they charge the government when it goes looking for funding. That matters for people countrywide.
A negative pronouncement would normally cause the government’s cost of borrowing to increase. Over time, that filters through to the rates that consumers pay when they fund everything from mortgages to student loans. And for those at the lower end of the income scale who rely on the state for assistance, whether through grants or provision of basic services, it means there is less money for those and more to hand over to fund managers.
So the latest report on SA by Fitch Ratings, which already rates the country’s debt as noninvestment grade, is reason for all of us to panic.
The message from Fitch was truly dire, if unsurprising. Fitch was so direct in its assessment that there’s no need to read past the first six lines.
The depressing thing about the growth numbers is that we are not only underperforming successful economies but also those that are considered to be junk — we are among the worst of the worst.
Due to a weaker economy and extra spending on state-owned enterprises, Fitch sees the deficit as a percentage of GDP jumping to a whopping 6.3% in the 2019/2020 fiscal year, almost two percentage points above the government’s 4.5% forecast.
With no prospect of an improvement in the country’s growth prospects in the short term, the debt-to-GDP ratio will likely reach 68% in 2021/2022. In its February budget, the government forecast a peak of 60.2% in 2023/2024. The current median for countries in the BB category is 44.6%, according to Fitch, which on Friday kept SA at BB+ with a negative outlook, meaning the next change will most likely take us deeper into junk status.
Predictions on growth are equally alarming and should panic any responsible government, especially one already faced with an unemployment rate, including discouraged workers, that is nearing 40%.
Fitch now sees SA’s potential growth at just 1.7%, half the BB median of 3.4%. The depressing thing about the growth numbers is that we are not only underperforming successful economies but also those that are considered to be junk — we are among the worst of the worst.
That hurts. Not just for the country’s finances, but also its morale.
And on Tuesday we go back to the scene of the crime — Eskom Megawatt Park — to get more details on the scale of the damage that has been wrought on what was once one of the world’s best energy companies. The expected record loss for 2018 is unlikely to be the worst of it, with the country likely to be saddled with yet more rescues and above-inflation tariff increases to keep the company going.
There will of course be more promises to fix it, which the government will eventually renege on as it comes under pressure from unions and is intimidated by promises of “blood on the floor”.
As we are confronted with the scale of the consequences of the corruption that engulfed Eskom during Jacob Zuma’s leadership of the country, focus will also turn to the country’s law enforcement authorities. Shamila Batohi has had a long enough honeymoon since being appointed to head the National Prosecuting Authority in February, and the lack of action to hold the agents of state capture to account is slowly eating away at the optimism that greeted her appointment.
Eskom is a symbol of the impotence of both the country’s supposed corruption busters and an ineffective government in the face of a fiscal crisis.
It’s time for both to step up.