Is SA’s public debt too big, or is there another problem? Moneyweb jurnalist Felicity Duncan elaborates on South Africa's position in what seems to be a trend in today's global economy.
Last week, the ratings agency Moody's lowered its outlook on South African sovereign debt to nega..., effectively placing the country on watch for a downgrade from its current A3 rating.
On the face of it, this suggests that South Africa has a debt problem, or more accurately, that Moody's is worried about the country's ability to pay back its debt. Certainly, markets reacted as if this were so - the rand weakened and the JSE lost momentum, which is just what you would expect in the case of a country groaning under the weight of too much debt (here's looking at you, Greece).
But is this the correct interpretation of Moody's announcement? Does SA have a debt problem, or is there something else going on? As regular readers know, this column is about reflecting on some of the bigger questions facing the South African economy - questions of policy and future direction. And the possible Moody's downgrade is ultimately about something much more substantive than South Africa's debt burden, it's about what kind of country South Africa is going to be.
SA debt
Now, don't get me wrong, South Africa's debt position has indeed deteriorated in the recent past. Post-1994, South Africa's public debt levels initially fell sharply, hitting a low of 23% of GDP in 2007 (IMF data), and the government kept a more-or-less balanced budget for much of the 2000s. However, after the financial crisis and the 2009 recession, the government began to spend (and borrow) more in a bid to help boost the economy as private spending collapsed.
In doing this, the government was pursuing a counter-cyclical fiscal policy - it saved when times were good (with budget surpluses in 2007 and 2008) and spent when times were bad (with deficits in 2009, 2010, and 2011) - a move which probably saved the country from a more-painful recession.
However, it also meant that the country's debt ratio began to rise, hitting 32% of GDP in the last year, and expected to get up to almost 35% over the next year (see chart). Finance minister Pravin Gordhan has said his goal is to have this ratio peak at 40% (a widely accepted international upper limit) by 2015, after which it will start to decline. This increase could be seen as alarming in certain circles, especially given the problems in Europe's sovereign debt markets.
What's more, a lot of this extra spending has gone to things like social grants and, particularly, public sector wages. Wages have risen much faster than inflation, and are expected to account for up to 42% of national government spending this year, up from around 33% in 2007. This kind of spending is unproductive, it would be better to spend that money on infrastructure that could help create jobs, and its rapid growth is unsustainable. So it's true, in a way, that South Africa has a potential debt problem.
The bigger truth
The real issue, however, is that what South Africa has is more a political problem. Moody's isn't worried about the nation's ability to pay back debt; it's worried about government's willingness to pay back debt, and to keep debt at reasonable levels.
Moody's said as much in its announcement, noting that part of the reason for the outlook downgrade was, "the growing risk that the political commitment to low budget deficits and the ability to keep within current debt targets could be undermined by popular pressures and rising internal strains within the ANC, and between the ANC and its partners in the Tripartite Alliance (COSATU and the SACP)."
The problem, in other words, is that shrill voices within government and within the ruling party have been raised in favour of policies like land grabs and nationalisation that would seriously hurt South Africa's fiscal profile, and Moody's is worried that those chaps will get the upper hand.
Problem solved?
Happily (and coincidentally), South Africa promptly took measures seemingly designed to appease these political and policy worries. First, the Reserve Bank decided to leave interest rates unchanged - a sensible, conservative, and widely expected decision, given the twin pressures of slow growth, high unemployment, and rising inflation.
Second, the ANC decided to discipline its wayward son Julius Malema, suspending him for five years for the crime of "damaging the standing of the ANC and South Africa's international reputation."
On the face of it, this is good news. However, Malema will appeal the decision, and the move risks opening up a nasty rift in the ANC and creating additional political uncertainty. Nevertheless, the clear signal that the ANC intends to clean house and to maintain its current moderate policy stance and sensible fiscal approach is very welcome. It will not eliminate political anxieties in sovereign debt markets, but it's a pretty good start at solving South Africa's political problems.
By Felicity Duncan
*This article first appeared in Discovery Invest and on Moneyweb.
Category: guest article
