Positive flag: Top Politicians Understand What a Ratings Downgrade Means
As I wrote recently, South Africa is speeding towards a cliff in a general sense. This can be narrowed down to include the much talked about fiscal cliff. This proverbial cliff is reached once the government expenditure starts becoming too unaffordable in terms of the tax burden that is placed on productive citizens, and prohibitive in terms of rising borrowing cost, leading to a potential debt trap.
The Finance Minister and Reserve Bank Governor (the 2 most important roles in any government) appear to have come to the party in the sense that they are at least coming across as very calm and reassuring through their words. They appear to have been given room to manoeuvre by those at the highest levels of government to do what needs to be done to save the economy by promising cuts in spending and raising interest rates. It is still uncertain however whether the individual at the highest level of government understands what interest rates are.
It should however be noted that it was Pravin Gordhan (clearly a Keynesian) who in his first spell ran deficits and gave repeatedly incorrect forecasts of economic growth. Regardless, he is now stuck with an almost impossible task of:
1) Reigning in spending to ease the concerns of ratings agencies and keeping our national bonds at ‘investment grade’ level.
2) Preventing the economy from shrinking despite cutting expenditure and raising taxes.
3) Keeping civil servants and the electorate happy by not cutting public sector wages, subsidised services or social grants.
All the above can, and must be done voluntarily. If a downgrade is not avoided, government will be forced into making unpopular cuts. A debt downgrade will result in a double whammy of problems. Firstly, government won’t be able to affordably borrow money to fund spending, and secondly, the devaluation of the rand will lead to significant inflationary pressures.
The economically enlightened members of government also need to compensate for the narrow minded ideology of the left wing members of our government who don’t understand economics and will only feel the urgency of the situation when their departments are running out of funds. Reality can still come crashing down on those wishing for a ‘national democratic revolution’.
The government and all South Africans need to reconsider what the role of government is in society. It simply can’t go on intervening in industry as much as it does, and encroaching on all sectors of society. It soon won’t be able to afford to. It needs to reform labour legislation, privatise state owned companies, and abolish all non essential ministries.
It is encouraging to see government engage with top business leaders (many of whom are doing great jobs running world class companies) over how to avoid economic crisis.
Some elements in South African politics will call out the government’s new found respect for private sector advice as ‘caving in to white monopoly capital’. At this point it would be crucial to stress that a further ratings downgrade or currency devaluation is in no one’s interest. The rich will see their South African wealth devalued along with the currency, and will be hesitant to invest more into the economy. The middle classes will suffer due to rising interest rates, rising taxes and mass retrenchments that go along with a stall in economic growth and investment. The poor will suffer the most, as they will feel the impact of inflation when the paycheque or social grant can’t buy as much as it used to.
There is a risk that at this point, the more regressive and authoritarian players will use the chaos to call for destructive policies such as money printing, price controls and if it comes to it, isolation from the international community by rejecting a potential IMF bailout.
The world economy is weak and no one knows when the resource sector will pick up again. All of the easy options are exhausted. Government really needs to come to the party, put its foot down and implement austerity.