South Africa on its way to become another Zimbabwe or Venezuela

South Africa has three months left to get its fiscal house in order or risk losing its investment-grade rating. With the economy stagnating, an unemployment rate that’s stuck at about 30% and the country in danger of losing its sole investment-grade credit rating as the state’s finances deteriorate.South Africa’s public finances are in a perilous state. Economic growth is low or non-existent. The tax revenue collection is repeatedly below forecasts. Debt levels have risen rapidly and are now at their highest levels in the post-apartheid era. And Finally, The poor performance of state-owned enterprises is necessitating large-scale government support.What this country is going through is a stagnant economy, high youth unemployment rates, a highly charged political landscape and widespread inequality . Welcome to The Atlantis Report. Following a review of South Africa, Moody’s Investors Service on Friday revised the country’s outlook from stable to negative, citing a slow pace of economic reforms. Last Wednesday, Finance Minister Tito Mboweni tabled a medium-term budget policy statement that painted a grim picture of South Africa’s finances. By the finance minister’s estimates, the country is heading into a debt trap. Over the past decade, South Africa’s public finances have come under more and more strain. The days when the economy was growing and former finance minister Trevor Manuel brought baskets of fruit to parliament have been replaced by declines in the size of the economy per person and rising unemployment. This was symbolized earlier this year when finance minister Tito Mboweni brought a few drought-resistant bitter aloes to his budget speech. The World Bank has cut South Africa’s growth forecast for 2019 through to 2021, citing weak investor sentiment and lingering policy uncertainty. Growth for 2019 is now projected at 0.8%, half a percentage point lower than April’s forecast and unchanged from 2018, according to the bank’s October Africa’s Pulse report. The Absa Manufacturing PMI dipped to 41.6 in September from 25.7 in August, the second consecutive sharp decline in factory activity, and South Africa’s most significant in a decade. Economists are in agreement a lack of political will, as identified by Moody’s, is an impediment to the much-needed reforms. Part of the Moody’s report reads, “In the last two years, it has become apparent constraints are challenging the government’s ability to implement reforms .” Things could have been worse, says Gina Schoeman, an economist for the Citibank Global Economics team. South Africa can count itself fortunate Moody’s did not place the country on a 90-day credit watch, which would have been a worst-case scenario for the sovereign. “A negative outlook is not as harsh as the 90-day credit watch,” said Schoeman. “What saved us from that was the fact the MTBPS introduced [a] new fiscal target for the February 2019 budget. Now, that is what [National Treasury] need to achieve if they don’t want to get downgraded by Moody’s as early as March, assuming that’s when it does its next review.” When a sovereign credit rating agency puts a country on a negative outlook, there is, on average, 12 to 18 months when the negative outlook lasts. Then it is resolved to either a downgrade or a stable outlook, says the Citibank economist. Market machinations. Moody’s released its review report at midnight local South African time last Friday, and well after markets closed in New York and Johannesburg. It is custom for the agency to do this to mitigate against adverse market reaction and speculative activity. Sovereign credit rating announcements ordinarily manifest in wild swings in the rand, South Africa’s currency, one of the most traded among emerging-market currencies. Sovereign credit rating reviews also have a material effect on a country’s bond yields. However, despite the harsh tone of Moody’s review and the agency changing the country’s outlook to negative, this was not reflected when the market opened on Monday. “Typically, high-yielding countries get speculative inflows and, therefore, their currencies look stronger than they actually are as soon as that falls away, the currency struggles. The problem [with South Africa] is this is not showing […] how bad a downward cycle has been in the credit-rating space,” says Schoeman. A Downgrade plan needed. S&P Global Ratings and Fitch Ratings have South Africa on sub-investment grade or junk status. Moody’s has the country a rung above junk status and affirmed its Baa3 rating. In addition, Fitch has South Africa on a negative outlook. Ordinarily, these undercurrents would be felt in the trading environment. But that is not the case for South Africa. And, for Schoeman, this is cause for concern. “The market dynamics are counterintuitive,” she says, pointing out that when bond yields opened on Monday post-Moody’s, you would think it was an actual event. “But you have so much else going on around the world, it was largely priced in, and so, therefore, expected. Also, you have the search for yield.” Schoeman was not optimistic. “We have always had a Moody’s downgrade as a baseline forecast for the second half of 2020, but we have moved it to the first half. We don’t think. [National Treasury] will be able to deliver. In February. The February budget could look better, but it might not be enough.” In the event of a downgrade, South Africa needed a realistic plan, “[…] so that people start looking at you as a firm Ba1-rated (speculative grade) country. Then, you still have a prospect of moving one notch up, eventually”. “If you start, collectively, across all the agencies moving towards junk territory, once you are two notches or more in sub-investment grade, no one looks at you as a possibility of getting back to being an investment-grade country,” warned Schoeman. Don’t follow Argentina or Zimbabwe. Countries two notches below sub-investment grade start looking for bailouts from institutions such as the World Bank or the International Monetary Fund. “You don’t want to be an Argentina [or] a Zimbabwe. But through a bailout, you are not going to become anything close to a solid emerging market,” she cautioned. Schoeman was in agreement that, because the MTBPS had cut expenditure to the bare bones, the only other area to look was the public wage bill. But she questioned the viability of this, given the current three-year public sector wage agreement remained in force. At the earliest, wage discussions would open in the second half of 2020, well after the February budget. Fundamentals are all wrong. For Isaiah Mhlanga, a chief executive economist at Alexander Forbes, Moody’s negative outlook “signals they have assessed [the] long-term economic fundamentals to have deteriorated significantly compared to the February 2019 budget”. “If we do not see significant efforts in implementing reforms, we are likely to see a downgrade after the [February 2020] budget,” says Mhlanga. No pain, no gain. Reforms come with short-term costs and suffering, and those costs are going to accrue to some sectors of society. What is crucial said Mhlanga is that South Africa takes the short-term pain, which comes with instituting reforms. Failure to do so would result in the country having to stare down the prospect of having changes dictated to it by the IMF. “We have discussed on many forums how dire it would be if we were to approach the likes of the IMF. I don’t think we are close to that,” he said. “But the consequences of not doing reforms, when we still have the liberty to choose how we implement them, will likely lead us into those global finance institutions. Such reforms will come with harsh austerity measures that may not be acceptable. “I don’t think the politicians fully understand that. At the National Treasury, there is an appreciation of this. Outside of that institution, I am not sure they fully understand the damage this would do to policy freedoms that we will have in the future.” In Mhlanga’s opinion, the MTBPS should not be considered a statement of intent. “It is merely to demonstrate where we are. The solutions are known. It is a matter of implementation. There should be agreement [about implementation] among the various stakeholders across society,” he said. Schoeman and Mhlanga agree Mboweni and his team have three months in which to craft a credible budget. The clock is ticking. Even more relevant to south Africa situation than Zimbabwe and Venezuela is Argentina, “where the largest IMF loan in history has forced spending cuts on to the country that is entirely beyond their control. With South Africa’s GDP slumping to its lowest spot in a decade and an economic collapse seemingly imminent, many analysts had believed the International Monetary Fund’s recent statements had been aimed at SA and indicated a possible bailout. An IMF bailout may still be on the cards. What would such a bailout look like? Well, seeing as it would be a first for South Africa, we have no historical point of reference, and yet we can look to bailouts elsewhere to gauge some of the repercussions. The IMF only intervenes where it can demand extreme structural reforms and economic austerity. A potential IMF loan would simply be a temporary solution to a pressing economic problem or a continuing millstone around the neck of a struggling economy. This is socialism at its best. Socialism fails every time it is tried. Until the ANC admits that, expect the spiral to continue. South Africa like every Socialist model, South Africa will collapse. The ANC doesn't prioritize growth or building of anything sustainable. Their only line of thinking involves the taxing and levying of the wealthy and middle-class. The ANC and EFF have destroyed South Africa. Now that China owns all the mining rights to rare earth metals in South Africa they have no resource to help buy themselves out of this trouble. Soon South Africa will more closely resemble Zimbabwe . South Africa is on its way to become another Zimbabwe or Venezuela .










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