Newsroom Media

Now is the moment to press reset on economy


By Mr. Leslie Maasdorp, Vice Pres­i­dent and Chief Fi­nan­cial Of­fi­cer of the New De­vel­op­ment Bank

Published on April 12, 2020 by Sunday Times


The re­cent sov­er­eign down­grade to junk sta­tus is a defin­ing mo­ment and turn­ing point for SA. Com­bined with the po­ten­tially dev­as­tat­ing eco­nomic shock in­duced by the coro­n­avirus pan­demic, this new re­al­ity rep­re­sents the sin­gle big­gest test for the coun­try and its lead­er­ship in the demo­cratic era.

The lock­down and ef­fec­tive shut­ting down of the econ­omy over­shad­owed the news about the credit rat­ing down­grade, but as a re­sult of it SA is fac­ing the Covid-19 pan­demic in its most vul­ner­a­ble eco­nomic state.

In De­cem­ber 2015, six months af­ter I re­lo­cated to China as part of a team to es­tab­lish the New De­vel­op­ment Bank — an ini­tia­tive of the Brics as­so­ci­a­tion of emerg­ing economies — Brazil was down­graded to junk sta­tus. I saw first-hand how dev­as­tat­ing the eco­nomic con­se­quences of a down­grade to junk sta­tus can be — specif­i­cally, how swiftly the im­pact may be felt in the real econ­omy by house­holds and com­pa­nies alike.

Within days of the down­grade, the Brazil­ian econ­omy con­tracted into a deep re­ces­sion that lasted for eight con­sec­u­tive quar­ters, lead­ing to un­told mis­ery for large num­bers of peo­ple.

De­faults by com­pa­nies led to large-scale re­trench­ments, fu­elling un­em­ploy­ment and dis­rupt­ing the lives of or­di­nary Brazil­ians in in­tol­er­a­ble ways. To­day, five years later, Brazil re­mains stuck in junk sta­tus, search­ing for ways to bounce back to a sus­tain­able growth path.

His­tory is not much of a guide to how long it takes to re­cover from junk sta­tus, as each coun­try has its own con­text and con­di­tions ex­ist­ing be­fore its down­grade. How­ever, be­sides some rare ex­cep­tions (South Korea 1997-1999 and Ire­land 20112014), it takes, on av­er­age, up to seven years.

This is the first time since SA’s re­turn to global mar­kets in 1994 that we have had no in­vest­ment-grade rat­ing. SA is now con­sid­ered junk on the credit spec­trum by all three lead­ing rat­ings agen­cies, namely S&P In­ter­na­tional, Fitch and Moody’s. In the words of SA’s Na­tional Trea­sury, “it could not have come at a worse time”. In the space of just a few days the eco­nomic out­look for SA shifted de­ci­sively, and looks bleak.

Credit rat­ings mat­ter, since they are a mea­sure of the cred­it­wor­thi­ness of a coun­try’s gov­ern­ment. Rat­ings pro­vide for­eign in­vestors with in­sights into the level of risk as­so­ci­ated with in­vest­ing in the debt of that coun­try. With junk sta­tus, the mes­sage to in­vestors is that SA’s debt has in­creased to such an ex­tent that there is a prospect that the gov­ern­ment may not have the re­sources to pay back what it has bor­rowed.

The tim­ing of the down­grade re­vived ques­tions in some quar­ters about the ob­jec­tiv­ity and judg­ments of the rat­ings agen­cies. Af­ter the 2008 global fi­nan­cial cri­sis, rat­ings agen­cies were widely crit­i­cised for giv­ing highly favourable rat­ings to mort­gage-backed se­cu­ri­ties, which al­most brought the global fi­nan­cial sys­tem to its knees. As a re­sult, the rep­u­ta­tion of the agen­cies was se­verely dented. How­ever, de­spite the agen­cies’ short­com­ings, in­vestors rely on this seal of ap­proval and use the rat­ings as their guide. There is no opt­ing out of this re­al­ity.

The key driv­ers be­hind the down­grade in SA are well known. In brief, the coun­try has seen a slow and sys­tem­atic ero­sion of its eco­nomic fun­da­men­tals over the past decade. The pic­ture is not pretty and in­cludes weak growth since the global fi­nan­cial cri­sis, an un­sus­tain­able rise in gov­ern­ment debt, widen­ing of the fis­cal deficit, bailouts to loss-mak­ing state-owned en­ter­prises, waste­ful ex­pen­di­ture and cor­rup­tion, and short­ages in elec­tric­ity sup­ply, which in turn fur­ther de­pressed eco­nomic growth.

Against this back­drop, it is clear that the de­ci­sions by the credit rat­ings agen­cies to down­grade SA were back­ward-look­ing and retroac­tive, and had lit­tle to do with the on­set of the Covid-19 pan­demic.

As in Brazil, the down­grade will have ma­te­rial ad­verse con­se­quences for ev­ery South African in all facets of our lives. As an im­me­di­ate trig­ger, the rand dropped to an all-time low, be­low R19 to the US dol­lar. It is now only a mat­ter of time be­fore the spillover ef­fects be­come real. No-one will be spared its con­se­quences.

The coun­try now faces the real prospect of a sus­tained re­ces­sion lo­cally, which will be made sig­nif­i­cantly worse by the new re­al­ity of a com­ing deep global re­ces­sion.

The ex­act na­ture, size and du­ra­tion of the eco­nomic down­turn in SA re­mains un­known. How­ever, the scale of the cri­sis is likely to be daunt­ing and de­pen­dent on the pace of re­cov­ery of the world econ­omy, over which SA has lit­tle to no in­flu­ence.

If ever there was a mo­ment to press the re­set but­ton, it is now. The re­set will re­quire a new mind­set that no op­tion can be ruled out to re­sus­ci­tate the econ­omy and sus­tain liveli­hoods. “What­ever it takes” has to be the new motto to guide lead­ers in the gov­ern­ment, busi­ness, labour and civil so­ci­ety.

This in­cludes ex­plor­ing fi­nan­cial sup­port from mul­ti­lat­eral in­sti­tu­tions such as the World Bank, In­ter­na­tional Mone­tary Fund, New De­vel­op­ment Bank and others. They have been specif­i­cally set up to step in when coun­tries face ex­ter­nal macro shocks of this kind. At AAA or AA+ these mul­ti­lat­eral de­vel­op­ment banks have the high­est cred­it­wor­thi­ness and thus the least ex­pen­sive fund­ing.

The most im­me­di­ate task is to avoid a down­ward spi­ral into deeper junk ter­ri­tory. For starters, a cred­i­ble eco­nomic re­cov­ery plan is ur­gently needed. To meet the ba­sic stan­dard of cred­i­bil­ity, this plan — with clear time­lines — should si­mul­ta­ne­ously ac­cel­er­ate struc­tural re­forms to stim­u­late growth, pro­tect the vul­ner­a­ble, pre­serve jobs at all costs and ap­peal to a sense of na­tional sol­i­dar­ity across so­ci­ety.

The call for wage re­straint in the pub­lic sec­tor will re­main hol­low un­less it is ac­com­pa­nied by shared sac­ri­fice at all lev­els, in­clud­ing wage freezes and cuts in bonuses and other forms of ex­cess in the pri­vate sec­tor. Dras­tic mea­sures are re­quired, in­clud­ing com­pa­nies with­hold­ing div­i­dends to shore up their bal­ance sheets in the in­ter­ests of sur­vival in the medium term.

The fun­da­men­tal eco­nomic choices and trade-offs have never been starker. Sev­eral of the struc­tural re­forms will take many months and years to bear fruit.

To date, gov­ern­ment ef­forts to sup­press the spread of the pan­demic have been uni­fied, swift and de­ci­sive. The same re­solve and ca­pac­ity to take bold de­ci­sions are now re­quired on the eco­nomic front. In Pres­i­dent Cyril Ramaphosa, the coun­try has a leader with vast, tried and tested ex­pe­ri­ence in bring­ing the coun­try back from the brink.

Fur­ther­more, the coun­try’s core eco­nomic lead­er­ship team of fi­nance min­is­ter Tito Mboweni and Re­serve Bank gover­nor Le­setja Kganyago com­mand the nec­es­sary cred­i­bil­ity to drive and im­ple­ment an eco­nomic re­cov­ery plan. Each is highly re­garded by the rat­ings agen­cies and mul­ti­lat­eral in­sti­tu­tions, hav­ing had the ben­e­fit of work­ing closely with them over a pe­riod of two decades.

Fi­nally, the lock­down has laid bare and ex­posed the deep in­equal­i­ties still preva­lent in our so­ci­ety. Com­mu­ni­ties liv­ing in vil­lages with­out run­ning wa­ter and san­i­ta­tion can­not be al­lowed to be­come a per­ma­nent fea­ture of our so­ci­ety. Over­crowded town­ships where poor ser­vice de­liv­ery has be­come a nor­mal fea­ture in peo­ple’s lives are a stark re­minder of the his­tor­i­cal legacy of apartheid, which 25 years of democ­racy have not be­gun to erase.

We can­not go back to the way it was be­fore. The ques­tion re­mains, what state will we be in when the clouds be­gin to clear?