Downgrade to junk will make all South Africans poorer – CEOs

Ratings agency Standard & Poor’s decision to cut South Africa to sub-investment grade has sent shockwaves through the country. On average, it takes seven years for countries to escape junk status and it’s looking ever more likely that other ratings agencies such as Moody’s and Fitch will also slash South Africa to sub-investment grade. And as S&P outlined in their statement last night, South Africans have our number one Zuptoid to thank for the junk status rating after he catastrophically decided to fire trusted Minister of Finance Pravin Gordhan (and his deputy Jonas) last week. Now, the consequences of Zuma’s bid to capture Treasury are starting to be felt and the economic situation for South Africans is expected to detoriate. If Zuma stays, further economic misery is certain, but if this starts the ball rolling on him leaving office, then it may be a case of it being the darkest hour before dawn. In this statement below, the CEO Initiative says that junk status is disastrous but that it should serve as an economic wake-up call. – Gareth van Zyl

From the CEO Initiative: 

South Africa’s growth outlook has been dealt a severe blow following the downgrade of the country’s long-term foreign currency sovereign credit rating to sub-investment grade. As a result of this downgrade all South Africans will be poorer and in particular it will put increased pressure on the most vulnerable sectors of our society.

Standard & Poor’s (S&P) decision was based on their opinion that the executive changes initiated by President Zuma “have put at risk fiscal and growth outcomes and that contingent liabilities to the state are rising”. This is a disappointing outcome as a number of green shoots were appearing in the economy following the tireless efforts over the past year of collaboration between government, labour and business.

This downgrade could and should have been avoided had the structural reforms necessary to underpin sustained and inclusive economic growth been implemented in the interests of all South Africans.

The most immediate effect of the downgrade is that the country will have to pay more interest on the money it borrows to deliver essential services such as housing and social welfare. It goes without saying that in a low-growth environment this leaves even less money for pressing national priorities such as education and healthcare.

Ratings decisions affect everyone in the country. When investors lose faith and trust in our economy, all citizens pay the price for this in the form of higher inflation, higher borrowing costs and decreased buying power as well as large reductions in the values of their savings, pensions and investments.

Progress towards higher levels of inclusive growth suffers as confidence levels fall and it becomes more expensive to fund investments. Lower growth means businesses will be less likely to expand and take more people into employment.

The CEO Initiative has always maintained that true, sustainable economic empowerment and transformation will only be achieved through inclusive growth. Populist policies that focus on short-term solutions with no regard for the liabilities that we bestow on future generations will only result in the economy slipping further away from providing opportunities that benefit all that live in the country.

South Africa can ill afford to have its limited resources – that should be spent on uplifting the poorest and most vulnerable in society – be stripped through self-seeking behaviour in the public and private sectors.

No good comes from a downgrade. Now that this has happened, what is important is how we react. South Africa needs leadership that is dedicated to the singular task of creating a conducive environment for pursuing policies that support higher levels of inclusive economic growth. Without this our country will not fulfil its democratic potential and all our people will be worse off.