credit rating economic policy

March on others’ advice, not our own needs, is at our peril

There is a pamphlet on the website of the Treasury that seeks to explain headline sovereign credit ratings in layman’s terms. It uses, as an explanatory device, descriptions of how a bank would treat a country as if it were an individual customer, at different points on the ratings scale.

Banks will not only lend you money at a very low interest rate if you are AAA rated, the reader is informed, but they will also offer you wine, tea, juice or anything you want if you enjoy such a rating. As you go down the scale, the interest rates are higher and the catering more basic. If you are deep into junk status, in the C ranks, it is only mashonisas who are willing to lend you money at punitively high interest rates.

The pamphlet, an accessible and humorous guide to ratings, speaks to the way the assessments of credit ratings agencies have made their way into mainstream consciousness. It hasn’t always been so.

Few South Africans can tell you when the country established itself as investment grade at the various agencies. Now, their pronouncements are keenly awaited. Across society, from left-wing academics to conservative businesspeople, the descent towards junk has come to signify the failings of the South African economy.

Commentators across the spectrum might ascribe the failure to different and often conflicting causes, but the benchmark has become the same.

In local economic debates, this has been taken too far. For some time, it was the imagined foreign investor who was used as the bogeyman to get the government to behave with economic prudence. If you do this, you will scare away foreign investment; if you do that, you will attract investment. Now it is the credit ratings agency.

There is nothing wrong with making arguments in reference to the investment climate or the government’s creditworthiness. These can be useful lenses to evaluate economic performance and they are factors that are closely linked to economic growth, although the relationship is not always straightforward.

However, the use of the outside, “objective” arbiter to bolster economic arguments is designed to evade debate among competing local interests.

Rather than each party putting up an honest fight on behalf of genuinely held concerns, there is an attempt to present neutrality: “This position is not what I think or want, it’s what will keep us away from junk status.”

For all this reliance on external authority, there remains a highly insular streak in the way economic debate is conducted. It is as if SA is uniquely targeted by credit ratings agencies and stands alone at the cusp of economic doom.

Yet, take Moody’s latest report on its outlook for sovereign credit ratings as an example. It’s clear that 2016 was a tough year. The agency has assigned a negative outlook for 26% of the countries it rates, the largest proportion since 2012. The reasons for this outcome, according to the agency, include low economic growth, high public sector debt that might rise further given the expansionary fiscal policies many countries are pursuing, heightened political risk and the possibility of capital outflows from emerging markets.

Rather than framing our economic aspirations against the needs and concerns of the unemployed or economically excluded, we are more comfortable with relying on the external gaze. We have seen, in recent times, what happens when grassroots contestation is suppressed in favour of apparent objectivity and expertise.

This will come back to bite us.

Makhaya is CEO of Makhaya Advisory.

This piece was published in Business Day (06 December 2016)

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