Wednesday, March 23, 2016

Our triple deficits

The most important is not about metrics but about behaviour.

This may be a case of shooting the messenger, and heaven knows South Africa certainly needs as many messengers of caution as it can get. But I am not easily drawn into the public hysteria that is sparked by the activities of the three main credit agencies, nor the “shaking in our boots effect” of Moody’s latest reconnaissance. This despite their negative impact on the domestic economy. These have been well covered and will not be repeated here.

It seems somewhat incongruous that the triad of S&P, Moody’s and Fitch can have such sway over sovereign economic destiny. These agencies have arguably not fully shaken off some of the mud flung their way after some inflated ratings that supported investments in dubious instruments, leading to S&P specifically facing a $5bn lawsuit a few years ago. It is a rather restricted club whose services are paid for by the debt issuers. (Although, of course one could argue this would tip the balance in favour of the issuer in the event of massaged ratings.) Admittedly too, the behaviour of rating agencies has been tempered more recently by regulation, the threat of law-suits and more agencies entering the field. Whether additional competition will blemish ratings to favour paymasters, remains to be seen.

However, this is not a repeat of a Moneyweb article of about a year ago when I wrote: “It is a moot point whether these agencies are comfortable with their power. But they have it. Whether they deserve it or should have it has become academic but under such circumstances they can expect their credibility to be constantly challenged, sometimes unfairly, but also with some justification.” 

That power is sourced not by their findings, or even their impact on investment decisions, but the inordinate effect on the domestic mood in turn fuelled by at times hysterical knee jerk responses. It is rare to see a sober overview of credit ratings as this one by Moneyweb’s Hanna Ziady. For the most part, credit ratings are greeted with much, often ill-informed, fanfare. Even the language can be emotive and sometimes dramatic. The word “junk bond” alone, instead of the term “sub-investment grade”, “evokes thoughts of investment scams”, according to Investopedia. But then it goes a step further. Sloppy journalism invariably uses phrases such as “South Africa will be downgraded to junk”. And from the mouths of politicians, one can even hear terms such as “we are now a junk country”; consigning the entire nation to junk. Some have even gone as far as to warn of a “failed state”, showing little understanding of what failed states such as Libya or Yemen really look like.

Credit ratings also become a political football with expedient politicians and other vested interest using them in an often highly dramatized fashion. We saw much of that prior to the last budget, leading to the firm conviction that Finance Minister Gordhan’s primary, if not exclusive budget task was to avoid a negative response from a bunch of suits across the Atlantic. That pressure no doubt also came from within the ruling party itself to sway the less economically informed of the executive, including the President himself, of the need for fiscal discipline.

So it was not surprising to hear the first question asked by reporters soliciting comment on the budget and Gordhan’s recent spin effort abroad: “Did he do enough to avoid junk status?” All of which led to something of a conundrum captured in Moody’s response that there should be more emphasis on economic growth. That’s a bit of a contradiction to fiscal austerity, albeit not totally unachievable, perhaps even quiet feasible with more effective spending and less waste.

The need for being an attractive and favoured destination for capital can never be understated, and credit rating agencies have to be wooed as a significant factor in achieving that. For a significant part they, and most economic analysts, look at the “twin deficits”: that of the budget, which is simply the difference between Government revenue and expenditure accumulating in our sovereign debt; and the balance of payments which is the difference between what we spend and earn with other countries and of which trade in goods and services, or the balance of trade, is the most significant. The latest figures reflecting all of these can be found here, and I will not clutter this column with statistics.

Because the most important deficit of all cannot be captured in hard numbers. It is the trust deficit, or the credibility gap. As Gordhan himself put it “the economy and South African society needs to win back credibility”. This credibility is the outcome of our behaviour as a nation, and has the most profound impact of all on the numbers, not only in terms of their actual state but also how they are assessed by others.

Numbers are always the outcome of behaviour. Our sovereign debt is a good example. At about 46% of GDP, it has solicited much concern. But it pales into insignificance to Japan’s 230%, which has an A+ stable rating. One reason is that Japan’s debt is mostly funded domestically, but then South Africa only has a 10% foreign component to its central government debt. The real difference is Japan’s credibility, or simply put, the faith people have in the country to meet its commitments. One could also argue that Japan therefore still has a trust surplus.

It is in that trust gap where South Africa has its biggest problem. We are a long way from defaulting on any of our debt commitments. What concerns most, including no doubt the credit rating agencies, is the behaviour of leadership and political and social stability. We rank as one of the lowest countries in the world in trust in government, which must spill over to global perceptions.

There are so many negative experiences on a daily basis that the accumulative effect on sentiment and perceptions both here and abroad must be devastating. They emanate from behaviour at many levels, including individual, institutional and other collectives, and from racial tensions, violent student protests, labour disputes, civil unrest, the current Gupta debacle and corruption and governance. All blindly follow their own narrow agendas with little regard, or even only remote knowledge of their effect on how we are rated as a nation.

Of course it is demeaning to kowtow to strangers. But we should not be doing things to please them. We should be doing them because they are the right things to do.

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