Downgrades Are A Judgement on South Africa’s Policy Course - Rational Standard

5 May 2020 - It’s hard to imagine a more destructive conjunction of circumstances for South Africa’s economy: a recession, unemployment at close to a third of the workforce, a shutdown in response to a frightening epidemic, and now a credit-rating downgrade.

Terence Corrigan
It’s hard to imagine a more destructive conjunction of circumstances for South Africa’s economy: a recession, unemployment at close to a third of the workforce, a shutdown in response to a frightening epidemic, and now a credit-rating downgrade.

In recent times, Moody’s joined S&P and Fitch in consigning South Africa to sub-investment grade – or ‘junk status’ – and S&P and Fitch dropped their ratings another notch, a process that has been years in the making, and about whose consequences South Africa has loudly been warned.

That the most recent downgrades were delivered as South Africa was embarked on its lockdown was a combination of blows that seems almost to have been scripted. Treasury commented that they could not have come at a worse time.

In practical terms, debt is climbing, and will become ever more expensive to service. The possibility of a debt trap is real, and the feasibility of a stimulus programme diminished. For ordinary South Africans, it implies shrinking room for spending on services, and quite possibly tax hikes.

It also signals something profoundly concerning; that faith in South Africa’s future is fading.

What we are living through today is without doubt one of the darkest moments in the country’s post-apartheid life. Not only are we in a deep, deep malaise right now, and not only are millions of South Africans actively being prevented from earning an (often meagre) living, but the prospects ahead look bleak.

This in turn threatens to contribute to social stresses, and to drive the exit of skills, entrepreneurial ability and capital even harder.

Not for nothing did finance minister Tito Mboweni declare: ‘To say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement.’

Or, as Dr Mark Mobius, then of Franklin Templeton Investments, phrased South Africa’s challenge starkly a few years ago: ‘They’ve got to make South Africa a much more attractive place for investment… I’m not only talking about foreign investment. I’m talking about local investment.’

It is important to keep in mind just how much of this was effectively self-inflicted. South Africa’s is a sophisticated economy, with great potential – as Moody’s acknowledged in its statement – but the baleful influence of politics and ideology have directed policy choices that have undermined it.

Perhaps the most obvious indication of this is what Moody’s referred to as ‘uncertainty over property rights generated by the planned land reform’.

In its domestic formulation, this is Expropriation without Compensation (EWC). It is hard to think of anything more effective at chasing business away than the spectre of the confiscation of its assets. We at the Institute of Race Relations have repeatedly been told that more than anything else, it makes the country ‘uninvestable’.

Bizarrely, even though EWC has been on the agenda for well over two years (as a formal positon of the ruling party), the sense of threat and the ‘uncertainty’ it has engendered seems if anything to have grown. Initially, it might (and in our experience, was) written off by many observers as mere political posturing and in any event of concern only to farmers, and also constrained by the country’s constitution and legal system.

This is no longer credibly the case. Reliance on the constitution seems rather pointless when the dominant thrust of the EWC drive has been to alter it, to loosen its constraints. That the weight of opinion against an amendment was ignored was troubling enough – strongly suggesting that endorsing the change was a foregone conclusion.

And shortly after a proposed text for the amendment was proposed, the African National Congress indicated that it sought greater latitude for the state to seize private property by endowing the executive rather than the courts with this power.

This is a large and fundamental change. It goes well beyond the reassuring notion that it would merely ‘make explicit that which is implicit’.

Along with this is the Expropriation Bill, which would enable the deprivation of property without this being, legally, ‘expropriation’. Hence, no compensation would be payable.

And hovering over all of this is the threat that the end point of this is a mass custodial taking of land as a national asset, along the lines of water or minerals.

None of this augurs well for the country’s economic future. There is a powerful irony in this. The ANC’s 2017 conference resolution said that ‘we must ensure that we do not undermine future investment in the economy, or damage agricultural production and food security. Furthermore, our interventions must not cause harm to other sectors of the economy.’

The consequences of this policy course have been predictable – even President Ramaphosa’s investment envoys warned about it – and are now to all intents and purposes undeniable. The downgrades have made it clear that it is undermining future investment.

This is now reality. South Africa will need to decide how it responds. While all eyes are now on the Covid-19 pandemic, we will shortly need to look to our policy responses in light of the daunting economic future that looms before us. The impact of EWC has, for its part, become very clear.

Terence Corrigan is a project manager at the Institute of Race Relations.