SA must get its house in order to avoid universal junk status: economist warns

Moody’s decision to reduce the outlook for its credit rating of the SA government from 'stable' to 'negative' means the country must now get its economic house in order to avoid universal junk status later.

That’s the reaction of North West University business school economist Prof Raymond Parsons who said Moody’s decision was not unexpected in the light of SA's weak economy and deteriorating public finances.

“The Moody's review warns that, unless SA gets its economic house in order soon, it faces the possibility of an investment downgrade later. SA has thus been put on notice about the urgent need to improve its economic steersmanship.”

Purposeful collective action was required if SA was to eventually avoid universal 'junk' status, given the existing subinvestment ratings by Standard & Poor as well as Fitch, Parsons added.

“In the event of SA later lapsing into universal 'junk' status, there would be the potential capital outflows and higher costs of borrowing associated with SA's removal from global bond indices. This ultimately makes it more difficult and costly to finance growth by both the public and private sectors.

“Moody's message therefore is that the country must make a much more determined effort to break out of its 'low growth trap' but without falling into a 'debt trap'. The fundamental challenge to SA therefore remains the overarching one of implementing essential pro-growth reforms.”

The negative outlook in part conveyed Moody's increasing concern that the political will was not there to implement the official plans to turn the economy around, Parsons said.

He said the recent medium term budget policy statement (MTBPS), while offering a frank assessment of SA's current grim fiscal outlook, fell far short of creating the necessary confidence that key remedies were indeed going to be urgently implemented.

“Crafting a credible fiscal strategy to contain rising public debt has indeed presented policymakers with tough choices but choices that cannot any longer be avoided or indefinitely postponed, such as about Eskom.

“What SA basically now needs to remedy the fiscal situation is a strong and sustained improvement in its flagging growth rate, which must remain the overall priority in economic policy. Investor confidence needs to be boosted,” Parsons said.

He added that the forthcoming investment summit (November 5-7) would be another key opportunity to strengthen the close collaboration needed between government and business to promote the projects and policies required for job-rich growth. Moody's decision injects even more importance into that event, he said.