S&P downgrade might be what doctor ordered

They came, they saw, they tabulated, they left. Now we wait. A team from the S&P Global Ratings agency was in South Africa this week on an intelligence-gathering exercise ahead of a pronouncement on whether it will maintain its investment grade on the country or whether, for the first time in more than 15 years, it will relegate us to "speculative" - or, in popular parlance, "junk".

If skating on thin ice were an Olympic sport, we'd be sure-fire gold medallists at the next Games.

The agency met key government ministries, spoke to a combination of business leaders, economists and trade unionists and dived into the country's accounts.

Its opinions carry considerable weight among our lenders who will push up the cost of borrowing if the downgrade happens. An S&P committee meets during the next week and delivers its finding to the Treasury ahead of the June 3 public release .

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The question is: will the agency give South Africa another six months to show that the Treasury's efforts to cut spending, and the recent high-level co-operation between government, business and labour, are beginning to bear fruit?

The agency's biggest concern is the lack of economic growth.

If it cannot see signs of an upturn, it must assume public finances will be increasingly thinly stretched.

That would impact services, result in further social unrest and political upheaval, and ultimately raise the very real risk of default.

Already we spend more than 10% of our national budget on interest payments. A downgrade would divert money from what it should be doing to improve the lives of citizens, to paying debt.

The agency doesn't want to be caught with its pants down.

Currently, South Africa sits at the lowest possible investment grade. That gives it a one-in-three chance of being downgraded. The agency's track record shows that countries on a negative outlook are almost invariably downgraded. For a country built on a rainbow of optimism, it would be a body blow to our already fragile confidence.

Don't despair. An S&P downgrade would not be an economic death sentence; it would be a warning that we need dramatic policy changes.

A downgrade would not lead to automatic exclusion from the World Government Bond index. For that to happen, the world's big three agencies would need to rate South Africa's rand-denominated debt as sub-investment grade. The agency's June rating is on whether we can continue to service our dollar debt.

block_quotes_start A downgrade might just be what South Africa needs to radically adjust its failing economic model block_quotes_end

Of 132 countries rated by the agency, 52% are deemed investment grade. The balance are at varying levels of sub-investment or, in the agency's polite-speak, "speculative" grade.

Of 21 countries relegated to speculative grade in recent years, seven have clawed themselves back above that red line. Recovery has been all about how quickly countries have made the appropriate policy response to their economic failings.

South Korea took its downgrade during the Asian currency crisis on the chin and was back to investment grade in two years, having carried out dramatic reforms to provide security to lenders. Latvia rebounded in three years and Romania in six. It took Colombia 12 years and India an astonishing 16.

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A downgrade might just be what South Africa needs to radically adjust its failing economic model.

Co-operation between business, labour and government began earnestly only as the threat of downgrades loomed large - the first step on a path to reforms that could generate jobs-rich growth.

What is needed to avert a June 3 downgrade is for President Jacob Zuma to be unequivocal in backing Finance Minister Pravin Gordhan, whose appeal this week for support needs to be taken seriously.

Paul Harris once said the role of FirstRand's head office was to provide "high-level cover" for the bank's divisions. When things go wrong in the divisions, it is head office that minimises the fall-out.

Right now, South Africa needs head office to step up to the plate.

Whitfield is an award-winning financial journalist and broadcaster