WORLDVIEW: It’s time for SA government debt to be rated as junk

For the last two years, SA has lived in fear that Moody's – the last credit rating agency to rate South African government debt a notch above junk – will drop our rating. If this happens, the cost of government borrowing will rise, probably by quite a bit. The rand will probably weaken further. And ultimately, SA will probably need to be bailed out by the IMF, in a package with a lot of attached strings..This has been the pattern many other countries have experienced. Their debt is cut, their payments balloon, they are unable to borrow enough to finance their budgets in the market, and they are forced to turn to the IMF. The IMF is willing to ride to the rescue, but the loans and bailouts come with a lot of aggressive conditions, usually in the form of major spending cuts..This is widely painted as a very grim scenario, and rightly so. IMF conditions are notoriously unpleasant and painful, and frequently lead to significant social unrest. It's also very hard to recover from being in the position of needing a bailout – debt markets are not famously forgiving..___STEADY_PAYWALL___.But at this point, I'm starting to think that perhaps a downgrade might be good medicine for SA. Right now, the country is experiencing political paralysis around the tough decisions that must be made. Finance minister Tito Mboweni has loudly and clearly pointed out that Eskom poses an existential crisis to SA, but little has been done to reform the dysfunctional utility. President Cyril Ramaphosa has plenty of good ideas and a good cabinet team, but is spending much of his time fending off attacks from his political enemies..The endless distractions of corruption investigations, exposes, and scandals are forming a kind of smokescreen that is preventing the country's leadership from making difficult and necessary choices. There has been progress, but it is too slow and incremental to deal with the very significant dangers SA is facing..The grim reality is that the odds of a global recession are rising fast and SA is in a very vulnerable position. Dealing with a broad global downturn and its associated capital flight will be almost impossible, given the budget and growth constraints the country faces..In short, SA is stuck in a bog of rising debt, political paralysis, and economic stagnation. While Ramaphosa has the vision to chart a course out of the bog, he is being stymied by political enemies more concerned with defending their own petty fiefdoms than with the fate of the nation..And that's why I'm beginning to think that it's time for Moody's to pull the trigger on a downgrade..Once SA is rated as junk and the consequences start to pile up, no one will be able to claim that things are fine as they are. The odds are, in my estimation, very good that SA would need to apply to the IMF for help within a year of a downgrade, especially if global growth continues to slow..The IMF would come armed with a list of reforms that sane voices have been proposing for a decade – partial privatisation and reform of state-owned enterprises, cutting the unsustainable public sector wage bill, refocusing spending on productive areas, encouraging investment with a stable set of rules for business, and tackling the costs of corruption..This could give Ramaphosa's government the political cover it clearly needs to enact proposals that are unacceptable to its vocal left wing. It will be hard for trade unions to fight cuts when the government has no money to pay wages. When the choice is between fewer jobs or no jobs at all, unions may be more willing to negotiate a new future for Eskom..This may not be a popular opinion. Structural adjustments – the coy, anodyne term used to describe the IMF's slash-and-burn conditions – are painful. And the IMF makes mistakes. In the past, it has forced governments to cut nutritional programmes and child support grants, hurting children and families. Obviously, SA should refuse such conditions..But if Ramaphosa's team could work with the IMF to identify a set of reforms that would genuinely help SA's economic position, the structural adjustment could conceivably put the country on the right path..It's an extreme position to take. But after nearly twelve years of political problems, stagnation, and decline, SA needs an extreme solution.

WORLDVIEW: It’s time for SA government debt to be rated as junk

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