Daniel Silke: Moody’s bought a promise – can SA deliver?

Jumping into the ring, political analyst Daniel Silke says Finance Minister Pravin Gordhan definitely won round one with Moody’s. The decision to retain South Africa’s credit rating with a negative outlook was a positive but now the hard work starts, and the further rounds will be a tougher contest. Silke says government has to review policies, and unless concrete change is brought about, the writing will be on the wall. The bigger threat to South Africa’s credit rating lies with Standard & Poor’s and Fitch, as both currently have the country one notch above junk, and they report next month. In a lengthy analysis, Silke looks at the areas that need particular focus from government, as the Moody’s reprieve is far from secure. – Stuart Lowman

By Daniel Silke*

You can’t fail but to commend Finance Minister Pravin Gordhan for his ability to stave off the much-feared Moody’s ratings agency downgrade that only a few weeks ago seemed a foregone conclusion.

Gordhan – together with business and labour – managed to show a sense of unity in projecting a more positive commitment to better policies, more prudent debt management and a necessary review of the functions of state-owned enterprises.

South African Finance Minister Pravin Gordhan gestures during a media briefing in Sandton near Johannesburg, March 14, 2016. Gordhan said on Monday he had constructive discussions with ratings agencies on a roadshow in London and the United States last week as Pretoria tries to fend off downgrades amid weak economic growth. REUTERS/Siphiwe Sibeko
South African Finance Minister Pravin Gordhan gestures during a media briefing in Sandton near Johannesburg, March 14, 2016. REUTERS/Siphiwe Sibeko

Ultimately Moody’s has bought a promise from government – a promise to review the dismal state of policy formulation and fiscal management that was largely responsible for getting the country into a mess in the first place.

So as Moody’s provided South Africa with a very welcome reprieve, the tough decisions that require political buy-in now have to be enacted.

Moody’s – in its analysis – predicts that South Africa’s ailing economy has reached a plateau. The successive GDP downgrades over the last 18 months are, it argues, now about to turn the corner. Like all good economists, the ratings agency is basing its improved sentiment on GDP turning the corner.

Secondly, the agency is impressed with the expressed intention of Gordhan to introduce a new wave of fiscal discipline into the budgetary process. This includes a belief that the state-owned enterprise sector can be stabilised and that debt levels remain below 50% of GDP.

Thirdly, Moody’s have been impressed with the institutional integrity shown in the recent Constitutional Court and Gauteng High Court judgments on both the Nkandla and Spy Tapes issues. Similarly, they perceive an improved relationship between the state, the private sector and labour. Ultimately, they argue that a new policy framework for growth and job creations is around the corner.

Will SA deliver?

Essentially, Moody’s has bought a promise. The question now is whether the government – and South Africa – can deliver.

The reprieve from Moody’s is one thing, but perhaps even more urgent are the tough Fitch and Standard and Poor’s agencies, who have us only one notch away from sub-investment grade. They already have South Africa closer to the perilous junk status and they will take an equal amount, if not more, convincing.

But here’s the rub: promises and commitments alone do not stave off a ratings downgrade forever. Concrete action is required on a variety of fronts. And some turnarounds in policy direction require such a substantial political sea change and ideological reversal that fulfilling the promises might be more wishful thinking than achievable reality.

If growth is to resume its upward path, the state will need to commit with renewed vigour to a range of public private partnerships which allow the private sector a chance to assist in driving job creation.

Yes, Gordhan has done much to rebuild the years of decline in cooperation in this area, but seems to have little stomach for fully re-engaging and committing to the importance of the private sector in driving the programme.

Political buy-in

This requires a political buy-in from all sectors within the ANC and for it to embrace of the role of the business sector to assist. With South Africa’s headline unemployment rate now in record territory, there can be no better time than to mend the fences, put ideological differences aside and allow for a state and capital embrace.

Secondly, whilst Gordhan commendably has worked on the relationship between labour, the state and the private sector, the labour movement today is more divided than ever.

Just as the country needs a more united labour front, the Balkanisation of unions and related interests create more divisions than ever.

Cosatu has been reduced largely to representing public sector unions, Amcu continues to make gains outside of the platinum belt and Numsa and Zwelinzima Vavi are flexing their muscles outside of the confines of the ANC alliance.

As strike season approaches, getting a full buy-in from this important sector seems more illusive than ever.

Thirdly, whilst Gordhan has again expressed his frustration of the role of the SOE boards and their glaring inefficiencies and even ‘arrogance’, little has been done beyond ratchet up the rhetoric.

Yes, Denel has found some tough love from the finance minister, but ultimately, the country seriously needs to look at a part privatisation of non-functioning aspects of its moribund SOEs.

Ideological myopia?

President Jacob Zuma’s recent undertaking to ‘never sell South African Airways no matter what other people say” calls into question governments commitment to this important aspect of a turnaround for the country. Clearly, this reflects a combination of both ideological myopia and also a personal interest in SAA but it reflects poorly on Gordhan’s commitment for change.

Fourthly, strike season is almost upon us once again – as are local elections. And, as the drought bites into South African’s back pockets via soaring food prices, the demands from public sector unions for wage increases loom large.

The discrepancy between food price inflation and the overall inflation rate as well as continued high levels of unsecured debt in the country will make wage settlements all the tougher in the months to come.

South Africa simply cannot afford a continuation of last years loss of production due to strike days but the perilous state of the economy and the political and moral pressures from workers will add considerable strain.

Gordhan needs to deliver to Moody’s

Finally, whilst Gordhan has received a stay of ratings execution from Moody’s (but not yet from S&P or Fitch) he needs to give something back. He needs to deliver to Moody’s.

The country urgently requires a review of policies – those already legislated and those in draft format – to make them market friendly. Again, this is a political risk and one that will be tough to implement given vested interests and ideological constraints.

Read also: Gordhan’s roadshow: Reversing SA’s downward drift. A long 2016 to-do list.

In particular, the growing plethora of state intervention, regulatory burdens, controversial empowerment provisions, land tenure and ownership limitations and business ownership restrictions need urgent review. Seems there is very little stomach for any of this.

Instead, government (together with business) have committed to some easier interventions. These include upping investment in infrastructure and committing to additional support for small businesses. Whilst welcome, these initiatives are less ideologically challenging for government but are unlikely to kickstart the economy in any meaningful way without a holistic review of existing impediments and bottlenecks.

So, Gordhan has won a first round victory from Moody’s, but, to use a boxing metaphor, the latter rounds will be much tougher. It will pit the Gordhan-ites against those keen to preserve the status quo. And, the ratings agencies have now exacerbated a potential conflict already evident within the ANC. This is a reprieve that is far from secure – but far better to have it then not.

  • Daniel Silke is director of the Political Futures Consultancy and is a noted keynote speaker and commentator. Views expressed are his own. Follow him on Twitter at @DanielSilke or visit his website at http://www.danielsilke.com.