Sat, 06 Jun 2020

It was perhaps naive to think that the last remaining ratings agency keeping the country within investment grade parameters would be warm and fuzzy to a country in its hour of need.

Indeed, after holding out for as long as it could, Moody's was in no mood to delay further and its decision to downgrade South Africa to sub-investment grade can have profound implications for all.

We all know the immediate consequences of such a downgrade. Both cost of credit and capital outflows are likely to decrease alongside a domestic currency already under severe pressure. That much of the worst effects may already be factored in as widening credit spreads and an already weak currency suggest.

The real rub of the downgrade comes within the context of the inherited weakness of the domestic economy as a result of hapless policy formulation over many years and the draining of the state via state capture, graft and corruption. When you maliciously suck the oxygen out of an economy, there is none left in the times of crisis and need.

Not only is this significant, but the virtual cessation of all economic activity as a result of the 21-day coronavirus lockdown and the uncertainty thereafter, presents clear dangers only compounded by the very vulnerable conditions before the virus pandemic.

With a rising debt-to-GDP ratio already cause for concern when Finance Minister Tito Mboweni presented his - now largely defunct - Budget 2020 only 32 days ago, the ability of the state to finance its affairs was already shred-bare.

The issue, barely a month ago, was reducing salary increases for public servants, an SOE like SAA being under business rescue, and slashing some budgets to compensate.

Now, with a post-Covid-19 prediction from Moody's of a deep recession in South Africa for 2020, leading to a negative 2.5% GDP growth for the year, the prospects of mass retrenchments, an unprecedented reduction is domestic demand and a global environment detrimental to our export earnings, the old order of only 32 days ago is precisely that - old and defunct.

South Africa's sub-investment grade downgrade adds to the cost of capital. It adds to a negative risk rating for the country. It kicks you when you are down. And, it changes the political dynamic over how you react.

Given the extreme and rapid effects of the coronavirus pandemic on the domestic economy and our declining debt position, it seems more likely today that government will have to seek financial assistance from global lending agencies.

Although the ANC have fought off any notion of seeking outside help from an agency like the World Bank or IMF, in times of crisis, this becomes less about pride and more about absolute necessity.

And, South Africa will find herself in the company of many developing and debt-laden countries seeking such help, making the acceptance of such funds politically easier to bear. After all, if many nations seek such rescue, why should we resist?

There remains a mistaken view that South Africa can still mitigate the effects of the combined Covid-19 and downgrade crisis on its own - using the state to boost industrial production and institute large-scale infrastructural projects to kickstart employment and the broader economy.

Whatever infrastructure spending budgets available will likely be reprioritised into meeting the immediate social needs of the population in the wake of further job losses and its resultant threat to social cohesion - not to mention the health-care costs should the pandemic play out unfavourably.

Similarly, revenue predictions made in Budget 2020 are simply not going to happen, putting immense pressure on government coffers.

Politically, pressure is likely to mount within the ANC over just how to react in both the short and medium term. We are likely to see a further tranche of support for the small business sector and Covid-fighting institutions.

But the medium term will require a substantial injection of cash to begin the post-Covid recovery. It seems unlikely that South Africa, in its current budget projections, have the cash resources to accomplish this on its own.

For the ANC, it means putting aside its desire to independently forge a path ahead. It will require help and assistance from some institutions many have vilified for years.

It will take substantial compromise to get a political buy-in for loans from agencies seen as being part of a broader "Washington Consensus" intent on usurping our sovereignty.

It will also take compromise to adjust spending priorities away from ideological waste to the real necessities. These decisions will call for an entire review of government spending priorities - at least in the medium term.

It's going to hurt those who think they can still bail our SOE''s indefinitely. The cash is simply not there. Period. But when the chips are down, even the ANC will have to see the bigger picture.

Stabilising this economy, social cohesion and future growth will require substantial capital injections. And without global confidence as a result of the Moody's downgrade, only an injection of cash can mitigate.

The confluence of recent events has placed South Africa in an unenviable position - partly of her own making and of course, the "Black Swan" of Covid-19.

Fortunately, much of the world will face varying levels of the same problem so our own problems are subsumed amongst many others. That makes us less of an "outlier". We are just part of the rest. But it does mean a sea-change.

Simply put, the country will not be able to continue on its previous messy path of policy paralysis and political indecision. And that's how a crisis can unravel even the best laid plans - if there were any.

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