🔒 WORLDVIEW: Brutal honesty from the IMF, S&P and Moody’s

Politicians, whose main goal is always to remain in power, tend to soften harsh realities with pretty words. We’ve seen this a lot in the Brexit process – no UK politician seems willing to clearly state the trade-offs Britain must make as it tries to negotiate a new relationship with the EU. Instead, they have been assuring voters that they can have their cake and eat it too.

South African politicians are not immune to the lure of gently misleading voters. Many leading political voices have been in denial about the country’s economic crisis, and only a rare few politicians – Tito Mboweni foremost among them – have been willing to be blunt about the challenges SA faces.

Local asset managers and economists show a similar reluctance to ring the warning bells. As Magnus Heystek has pointed out, those who manage domestic assets have little incentive to warn people against investing domestically.
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External agencies, however, are not bound by the same desire to shield citizens from difficult truths. Thus, it is well worth reading their take on the status quo and what it will take to change it.

The IMF recently concluded an official visit to SA and published its usual Concluding Statement. While it uses the dry language innate to such documents, the IMF does not mince words. The whole statement should be mandatory reading, but its summary of SA’s current position is worth quoting in full.

Writes the IMF, “South Africa’s undeniable economic potential remains largely untapped and the recent economic performance points to rising risks. The economy faces three immediate challenges:

  • Persistently weak economic growth. Subdued growth is largely attributable to stagnant private investment and exports and declining productivity, mainly due to the slow pace of reform to address weaknesses in the business climate, including regulatory constraints, labour market rigidities, and inefficient infrastructure. Unreliable electricity supply has exacerbated the growth constraints. Small and medium-sized enterprises (SMEs) are especially disadvantaged in this environment.
  • Deteriorating fiscal and government debt. Weak revenue and increased current expenditure have worsened the budget composition, and raised deficits and borrowing requirements, undermining the sustainability of public finances. This fiscal trajectory has also lifted financing costs across the economy.
  • Major difficulties in the operations of state-owned enterprises (SOEs). Inefficiencies in SOEs operating in network industries such as electricity and transport, translate into costly inputs for businesses, and repeatedly require financial support from the fiscus.”

Harsh. And S&P’s recent note announcing its intention to place SA on a negative watch was even more concise and brutal.

“Low GDP growth, upwardly revised fiscal deficits, and a growing debt burden are damaging South Africa’s fiscal metrics. Unless the government takes measures to control the fiscal deficit and we see sustained reform momentum, we view debt as unlikely to stabilise within our three-year forecast period.”

As for Moody’s, when it announced it was changing it’s outlook for SA to negative, it simply wrote, “Moody’s decision to change the outlook to negative from stable reflects the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures. The challenges the government faces are evident in the continued deterioration in South Africa’s trend in growth and public debt burden, despite ongoing policy responses.”

The clarity and uniformity of global opinion on SA’s economic health are striking. SA is growing too slowly, it has too much debt, and it is not doing enough to turn things around. Worse still, most external observers suspect that the government lacks the political capital and will to enact the measures it knows are necessary.

That may be true. The measures needed – cuts to spending, retrenchment of public sector workers, and higher taxes – are likely to be painful and unpopular with voters. What’s more, in the long term, the necessary reforms to the labour market and the government’s approach to regulation will be a tough pill for the ANC and its allies to swallow.

The IMF reckons SA needs “fiscal consolidation” equal to 3% of GDP. With government spending hovering around 21% of GDP, that would be a nearly 15% cut in spending. The IMF recommends that most of the cuts focus on “compensation costs and transfers to SOEs” – in other words, salaries and Eskom bailouts.

This will be hard for the ANC, given that Eskom workers and public sector workers for a core element of their constituency. Equally challenging will be pursing the portfolio of suggested regulatory reforms, including opening up SOEs and infrastructure to private operators, decentralising wage bargaining, making hiring and firing easier, and breaking up SA’s many monopolies and oligopolies.

Too often, internal debate in SA becomes mired down in mudslinging, race-baiting, and the blame game. The analysis from the IMF, Moody’s, and S&P highlights the fact that the rest of the world is not at all interested in these internal slap fights. The world’s investors – the people who we are counting on to keep lending us money in the future – are only interested in what is actually happening and what we are actually doing about it.

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