What South Africa needs to do to avoid a downgrade

139
477

In early June the international debt rating agency Standard & Poor’s granted a stay of execution by not downgrading the South African government’s IOU certificate to a “junk debt” status.

This preserved the country’s credit worthiness as investment grade. South Africa should therefore be able to keep on sourcing external finance at a relatively affordable cost.

But Standard & Poor’s maintained a negative view of South Africa’s economic prospects. Moody’s passed a similar verdict last time it revaluated the country.

The close shave should be an opportunity for government and all stakeholders to step back and reflect on the averted economic calamity. In a sedate and panic-free mindset they can begin to set the economy and its management on a transformative growth path.

What went wrong

How did South Africa earn this negative outlook and why is it teetering on the precipice of a downgrade?

A reasonable explanation for the current state of affairs can be found in a combination of factors. These include:

  • a drop in commodity prices. This has had a significant impact on a major source of foreign exchange earnings;
  • a disruption in production due to industrial action by labour unions that has been badly managed by all concerned: the private sector, union leadership as well as government; and
  • the troubling mixed signals the country’s leadership has been sending to the nation and the world on effective governance.

These are factors over which the country can exercise control.

The protracted labour strikes and questions around governance are particularly responsible for the rating agencies maintaining a negative outlook. In my view these factors, alongside growth-oriented structural reforms, are standing in the way of the country getting onto a long-term sustainable growth path.

Government responds with band aid

The government revealed its strategy for dealing with the dim economic state that precipitated the threat of downgrade in its most recent budget. It was the usual response of austere posturing made up of a concoction of measures. These included government spending cuts, a civil service job freeze and increases in revenue by hiking “sin taxes” on alcohol, tobacco, sugary drinks, fuel, environmental degradation and capital gains.

These measures amount to nothing more than band-aid treatment. The rating agencies weren’t fooled by the budget measures. This is because they know that South Africa’s economic fundamentals are not that bad: the issue is the country’s future prospects.

This is best illustrated by comparing South Africa with its BRICS peers (Brazil, Russia, India and China) in terms of some of the metrics reflective of a country’s credit worthiness. It in fact doesn’t fare too badly.

The ratio of public debt to gross domestic product of Brazil and India are in the 60% range, way higher than South Africa’s 50% ratio. Of this only about 10%-20% (of total national debt) is attributable to external debt, the lowest among its peers except China. Its tax management system and financial system infrastructure rank highly among emerging-market countries.

Its main areas of dubious distinction are in the economic growth and current account deficit comparisons. This is where it lags behind most of its peers. South Africa has historically recorded the lowest growth rate among its peers, with a projection that this year’s may be in the range of 0.9%-1.7%. Its current account deficit is again the worst, with a five-year average of -5.5%. This is generally considered a red flag to fickle foreign investors thinking of exiting.

How the threat can be averted

The main thrust must be to grow the economy rather than imposing willy-nilly spending cuts and fixating on taming inflation.

The increase in revenue via “sin taxes” instead of income or profit tax is wise. But a much less burdensome revenue source would be to stop the illicit flow of funds out of the country. Global Financial Integrity estimates that the leakage of funds from South Africa, mainly from multinational corporations, was R330 billion per annum (about US$21.6 billion at current rates) between 2004 and 2013.

One major contributor is transfer pricing by multinational firms. Transfer pricing is when a company, seeking to avoid taxes, can make its profit/loss record show loss. This is achieved through increased expenses by fictitiously providing inputs/parts/advice to a branch in another country. By falsely reporting a loss it cheats the South African government of taxes it would have rightly paid on its true profit.

Other steps that could be taken, especially on managing the damaging recurring strikes, include:

  • firms extending profit sharing fairly. This can be done by increasing the salaries of line-workers or by giving workers equity share-based wage increases;
  • the enforcement of black economic empowerment measures to redress the destructive legacy of apartheid; and
  • unions sensibly and nonviolently demanding fairness by negotiating in good faith.

In addition, the government should pay more attention to decoupling revenue and, by extension, the budgetary process and economic growth, from commodity price volatility. This can be achieved by government building “rainy day” reserves. Taxes, or a royalty tax, could be imposed when commodity prices rise beyond a certain level. The funds can be used for important ongoing capital and social projects (such as maintaining or growing the national productive capability via strategic funding of education) during economic downturns.

The country should also institute economic management mechanisms such as creating a sovereign wealth fund for capital investment planning. This should be used for macroeconomic stabilisation and expanding the production base. Countries that have done this successfully include Norway, Kuwait and United Arab Emirates.

On top of this South Africa must begin to use its superiority in manufacturing capacity and services such as banking and information and communications technology, to grow intracontinental trade.

The issue of job creation must also be given a serious rethink. And careful consideration of ownership structures is particularly germane given the lingering legacy of apartheid. But privatisation of all activities is not a cure-all. For example, government may not need to run an airline business. This can be handled by the private sector or through a public-private partnership. On the other hand it certainly can insist on having a say in rail transport, electricity and water.

These production activities affect most households in terms of price affordability and employment.

Finally, to address concerns about corruption and state capture the government needs to adopt a servant-governance approach by strengthening institutions and ensuring their independence from political influence.

If pursued diligently, these measures would save South Africa from what currently looks like constant danger of a downgrade

139 COMMENTS

  1. I just want to tell you that I’m newbie to weblog and certainly savored you’re blog site. Most likely I’m want to bookmark your website . You amazingly come with perfect stories. Thanks a lot for sharing your website page.

  2. Appreciating the dedication you put into your blog and in depth information you offer. It’s good to come across a blog every once in a while that isn’t the same unwanted rehashed information. Wonderful read! I’ve saved your site and I’m including your RSS feeds to my Google account.

  3. Excellent read, I just passed this onto a colleague who was doing some research on that. And he just bought me lunch since I found it for him smile Thus let me rephrase that: Thank you for lunch! “Any man would be forsworn to gain a kingdom.” by Roger Zelazny.

  4. You’re so great! I don’t think I’ve actually read through something like this already. So wonderful to find another character with a little unique thoughts for this matter. Seriously.. thanks for launch this specific up. This specific web site is something that is required on the internet, a person having a minor originality!

  5. I am really enjoying the theme/design of your weblog. Do you ever run into any internet browser compatibility issues? A couple of my blog visitors have complained about my blog not working correctly in Explorer but looks great in Firefox. Do you have any solutions to help fix this issue?

  6. Whats Happening i am new to this, I stumbled upon this I’ve found It positively useful and it has aided me out loads. I’m hoping to contribute & help other customers like its aided me. Great job.

  7. I used to be recommended this website by means of my cousin. I’m no longer certain whether or not this submit is written via him as nobody else realize such specific about my trouble. You’re wonderful! Thanks!

  8. Pretty nice post. I just stumbled upon your blog and wanted to say that I have truly loved browsing your blog posts. In any case I will be subscribing on your feed and I am hoping you write once more soon!

  9. Hi! I know this is kinda off topic but I was wondering if you knew where I could find a captcha plugin for my comment form? I’m using the same blog platform as yours and I’m having difficulty finding one? Thanks a lot!

  10. Whats up very nice web site!! Man .. Beautiful .. Wonderful .. I’ll bookmark your blog and take the feeds additionally¡KI am glad to find a lot of helpful information right here within the post, we want develop more strategies in this regard, thanks for sharing. . . . . .

  11. Hi there, just became aware of your blog through Google, and found that it’s really informative. I am gonna watch out for brussels. I will appreciate if you continue this in future. Numerous people will be benefited from your writing. Cheers!

  12. Hi there, just became alert to your blog through Google, and found that it is really informative. I am gonna watch out for brussels. I’ll appreciate if you continue this in future. Many people will be benefited from your writing. Cheers!

  13. I needed to post you one very little observation so as to give thanks again about the unique pointers you have documented above. It is simply seriously open-handed of people like you to present publicly what a number of us might have marketed for an ebook in order to make some cash for their own end, chiefly considering that you could have tried it in case you desired. The things as well served to be the good way to know that other people have a similar passion just as my very own to figure out a lot more in regard to this matter. I’m sure there are lots of more pleasant moments up front for people who look into your blog post.

  14. Write more, thats all I have to say. Literally, it seems as though you relied on the video to make your point. You obviously know what youre talking about, why waste your intelligence on just posting videos to your blog when you could be giving us something enlightening to read?

  15. I would like to thnkx for the efforts you’ve put in writing this blog. I’m hoping the same high-grade web site post from you in the upcoming also. Actually your creative writing abilities has encouraged me to get my own blog now. Actually the blogging is spreading its wings rapidly. Your write up is a good example of it.

  16. We are a group of volunteers and starting a new scheme in our community. Your website provided us with valuable info to work on. You’ve done a formidable job and our whole community will be thankful to you.

  17. It is appropriate time to make a few plans for the future and it is time to be happy. I have learn this submit and if I may I want to suggest you few fascinating issues or tips. Maybe you can write subsequent articles regarding this article. I desire to read even more issues approximately it!

  18. Its like you read my thoughts! You seem to grasp so much approximately this, like you wrote the guide in it or something. I feel that you just can do with a few p.c. to drive the message house a little bit, but other than that, that is great blog. An excellent read. I will certainly be back.

  19. I¡¦ll immediately snatch your rss as I can’t find your e-mail subscription hyperlink or e-newsletter service. Do you’ve any? Please allow me recognise so that I may just subscribe. Thanks.

  20. Thank you a bunch for sharing this with all folks you actually know what you’re talking approximately! Bookmarked. Kindly additionally seek advice from my web site =). We can have a link change agreement among us!

  21. Great bblog right here! Also your web site quite
    a bit up very fast! Whhat web host arre you using?
    Can I am getting your associate hyperlink for your host?
    I waqnt my web site loaded up as quickly as yours lol

  22. Youre so cool! I dont suppose Ive learn something like this before. So nice to seek out somebody with some original thoughts on this subject. realy thanks for starting this up. this web site is something that is wanted on the web, someone with a bit originality. useful job for bringing one thing new to the internet!

  23. Hello there, just became aware of your blog through Google, and found that it is really informative. I am gonna watch out for brussels. I’ll be grateful if you continue this in future. Many people will be benefited from your writing. Cheers!

  24. I have been browsing online more than three hours these days, yet I never discovered any attention-grabbing article like yours. It’s beautiful worth sufficient for me. In my view, if all web owners and bloggers made excellent content as you did, the web can be much more helpful than ever before. “Baseball is 90 percent mental. The other half is physical.” by Lawrence Peter Berra.

  25. Hey just wanted to give you a quick heads up and let you know a few of the images aren’t loading correctly. I’m not sure why but I think its a linking issue. I’ve tried it in two different internet browsers and both show the same outcome.

  26. you are really a good webmaster. The web site loading speed is incredible. It seems that you’re doing any unique trick. Also, The contents are masterwork. you have done a excellent job on this topic!

  27. Hiya very cool web site!! Guy .. Beautiful .. Wonderful .. I’ll bookmark your blog and take the feeds also¡KI am satisfied to find so many helpful info right here in the submit, we want work out extra techniques on this regard, thanks for sharing. . . . . .

  28. Good ¡V I should definitely pronounce, impressed with your web site. I had no trouble navigating through all tabs and related info ended up being truly simple to do to access. I recently found what I hoped for before you know it at all. Reasonably unusual. Is likely to appreciate it for those who add forums or something, site theme . a tones way for your customer to communicate. Nice task..

  29. I would like to show some appreciation to you just for bailing me out of this issue. As a result of looking through the the net and finding solutions which were not pleasant, I believed my entire life was gone. Existing devoid of the approaches to the problems you have solved as a result of the write-up is a crucial case, as well as the kind that could have adversely affected my career if I hadn’t encountered your web site. Your good capability and kindness in taking care of every item was very helpful. I’m not sure what I would’ve done if I had not come upon such a stuff like this. I can also at this point look ahead to my future. Thanks for your time very much for this impressive and results-oriented help. I won’t hesitate to refer the blog to anyone who requires direction on this topic.

  30. Hiya, I’m really glad I have found this info. Today bloggers publish just about gossips and web and this is really frustrating. A good site with interesting content, this is what I need. Thank you for keeping this site, I will be visiting it. Do you do newsletters? Cant find it.

  31. Howdy! This article could not be written any better!
    Looking through this article reminds me of
    my previous roommate! He continually kept talking about this.
    I am going to send this post to him. Pretty sure he will have a
    great read. Many thanks for sharing!

  32. Hi there, just became aware of your blog through Google, and found that it’s truly informative. I’m gonna watch out for brussels. I’ll appreciate if you continue this in future. Lots of people will be benefited from your writing. Cheers!

  33. I found your weblog web site on google and check a couple of of your early posts. Proceed to keep up the superb operate. I simply additional up your RSS feed to my MSN News Reader. Looking for forward to studying more from you later on!…

  34. Hi this is somewhat of off topic but I was wondering if blogs use WYSIWYG editors or if you have to manually code with HTML. I’m starting a blog soon but have no coding skills so I wanted to get guidance from someone with experience. Any help would be enormously appreciated!

  35. hello there and thank you for your information – I’ve undoubtedly picked up something new from appropriate here. I did nevertheless expertise several technical issues making use of this site, as I experienced to reload the internet website lots of times previous to I could get it to load properly. I had been wondering if your internet hosting is OK? Not that I’m complaining, but sluggish loading instances times will very frequently affect your placement in google and could damage your quality score if advertising and marketing with Adwords. Effectively I am adding this RSS to my e-mail and can appear out for significantly much more of your respective exciting content. Make sure you update this once more soon..

  36. I truly wanted to post a simple comment to thank you for all the lovely items you are giving on this website. My incredibly long internet search has at the end been rewarded with good quality concept to talk about with my neighbours. I ‘d declare that we readers actually are quite endowed to exist in a remarkable community with very many outstanding professionals with valuable pointers. I feel quite grateful to have seen your entire website and look forward to plenty of more exciting moments reading here. Thanks a lot once again for all the details.

  37. Thank you for sharing superb informations. Your site is so cool. I’m impressed by the details that you have on this site. It reveals how nicely you perceive this subject. Bookmarked this web page, will come back for extra articles. You, my pal, ROCK! I found just the info I already searched everywhere and just couldn’t come across. What a perfect site.

  38. I was very pleased to find this web-site.I wanted to thanks for your time for this wonderful read!! I definitely enjoying every little bit of it and I have you bookmarked to check out new stuff you blog post.

  39. Thanks on your marvelous posting! I actually enjoyed reading it, you could be a great author.I will be sure to bookmark your blog and may come back from now on. I want to encourage that you continue your great job, have a nice afternoon!

  40. I had choices from essays to videos and I figured blogging can be fun. Can you give me a good free website and a little help on how to get started with what to say, and whether i put it under one day or do it every day until its due. Please help and I promise to select you as the best answer if it helps!.

  41. Thank you a lot for sharing this with all people you really realize what you’re speaking about! Bookmarked. Please additionally discuss with my website =). We may have a hyperlink exchange agreement among us!

  42. Hi there! Quick question that’s totally off topic. Do you know how to make your site mobile friendly? My website looks weird when browsing from my iphone 4. I’m trying to find a template or plugin that might be able to resolve this issue. If you have any recommendations, please share. Thanks!

  43. Greetings from Colorado! I’m bored to tears at work so I decided to check out your blog on my iphone during lunch break. I really like the information you provide here and can’t wait to take a look when I get home. I’m surprised at how quick your blog loaded on my cell phone .. I’m not even using WIFI, just 3G .. Anyways, superb blog!

  44. What i do not realize is in fact how you are now not really a lot more well-liked than you may be now. You are so intelligent. You understand thus considerably in terms of this matter, produced me personally believe it from so many numerous angles. Its like men and women aren’t interested unless it is one thing to do with Girl gaga! Your personal stuffs outstanding. All the time deal with it up!

  45. Attractive section of content. I just stumbled upon your website and in accession capital to assert that I acquire in fact enjoyed account your blog posts. Any way I’ll be subscribing to your feeds and even I achievement you access consistently quickly.

  46. You will find some interesting guidelines soon enough in this specific article but we don?t understand them center to heart if I see all of. There is certainly some quality but i shall grab keep viewpoint into it further until I look. Great post , thanks and then we wish considerably! Put into FeedBurner also

  47. Undoubtedly, Apple’s instance retail store is by way of distance. It’s a really variety of all kinds with programs versus a fairly sorrowful choice a handful for the purpose of Zune. Microsof company is applications, specially within the realm of exercises, still I am not sure It’s safe to need to wagered with the success detail aspect is crucial for your needs. Ipod could be a even greater determination if so.

  48. I do love the way you have presented this specific difficulty plus it does supply me personally some fodder for consideration. Nonetheless, through just what I have personally seen, I simply trust when other comments pile on that people today stay on issue and don’t get started upon a soap box associated with some other news du jour. Still, thank you for this fantastic piece and while I can not concur with it in totality, I value your point of view.

  49. Hey! Someone in my Facebook group shared this site with us so I came to look it over. I’m definitely enjoying the information. I’m book-marking and will be tweeting this to my followers! Wonderful blog and superb design.

  50. There are some interesting cut-off dates on this article however I don’t know if I see all of them middle to heart. There may be some validity however I’ll take maintain opinion until I look into it further. Good article , thanks and we wish extra! Added to FeedBurner as well

  51. A person essentially lend a hand to make severely articles I’d state. This is the very first time I frequented your web page and thus far? I amazed with the analysis you made to create this particular publish extraordinary. Wonderful activity!

  52. Hello.. . I would be grateful for advice on creative writing copywright issues.. . When submitting poetry, short stories, novels, or features to publishers and literary agents to consider for publication, is it an idea to protect the copywright?. . If so, what’s the best way to do this?. . Thank you in advance.. . bgscotty.

  53. La vie est toujours pas juste mais malheureusement nous n’avons pas cette force d’accuser quiconque mais Dieu étant amour a su donner la force à certains hommes de pourvoir aider des gens comme vous et moi pour vivre le pire, à être heureux, à affronter avec facilité ces expériences qui font trépasser certains. Visiter BlackMa pour tous vos besoins d’aides. http://www.blackma.be

  54. Il nous arrive souvent d’aimer une personne, énormément et de ne malheureusement pas pourvoir recevoir la réciproque des sentiments en retour. Blackma reste je pense le meilleur endroit pour trouver des maitres spirituels, des marabouts sérieux pour vous aider à rompre ces forces négatives qui nous entourent et nous empêchent d’être heureux avec celui ou celle que nous aimons. Je vous conseille de visiter http://www.blackma.be

  55. Hi there, just became alert to your weblog via Google, and located that it is genuinely informative. I’m gonna watch out for brussels. I is going to be grateful in case you continue this in future. Numerous people will likely be benefited from your writing. Cheers!

  56. I sign into my Tumblr account, and switch the dashboard from my main blog to the secondary blog, then I go to Account > Preferences > Customize your blog, but then it just takes me to the customization page for my main blog. Any way to customize my secondary blog, or should I just create a second account altogether?.

LEAVE A REPLY