Moody’s Axe will Fall, Unless South Africa Change Course Now

The probability of a credit rating downgrade from Moody’s Corporation does not necessarily equal ‘good’ news for South Africa’s economic prospects. It is merely the calm before the storm. It would be good news if South Africa had embarked on one or two of the required reforms – however, this has yet to happen. This temporary reprieve from Moody’s gives South Africa time to implement some of the changes required to right a seriously listing ship.

Lower tax revenue collection and a rising debt-to-GDP ratio are two critical factors South Africa must address in the coming weeks and months. State spending far outstrips the ‘revenue’ government collects from taxpayers. When checking your personal budget at the end of each month, you would be rightly concerned should you discover your spending is way out of proportion and that this represents a serious problem. This same principle applies to government spending: debt, whether public or private, must be paid off at some point. Massive government spending programs, especially the National Health Insurance (NHI), no matter how much politicians and government officials turn blind eyes towards them, are only going to add to the growing problem of debt.

Isaah Mhlanga, chief economist of Alexander Forbes, recently wrote: “The 2019 Budget Review forecast that debt will reach 56 percent of GDP in 2019/2020, rising to 60 percent of GDP by 2023/2024 before flattening out and remaining largely unchanged at 60 percent of GDP in 2026/2027.” These figures, of course, assume a certain level of economic growth. But the government should not be spending this much in the first place – the fact that it is in a context of low tax collection, is deeply irrational and irresponsible.

South Africa currently sits at 101 out of 162 countries on the Economic Freedom of the World (EFW) Report Index 2019, recently co-published in South Africa by the Fraser Institute and the Free Market Foundation. Our continued tumble down the Index since the year 2000, when we were at 47, shows years and years of wasted opportunities, years of statist economic policies that have only increased state control over us and made us poorer and poorer. Those to whom we have entrusted political power must wake up and realize the answers they seek lie not in the dead-end direction of increased government control and spending, but instead in liberating the economy and people from the policies and bureaucracy that prevent them from creating wealth for themselves and their families.

South Africa scores badly across the board on the EFW Index. One area of concern is Size of Government – here we scored 5.77 (out of 10). If the economy was growing, it could ‘handle’ a slowly growing government. But in South Africa’s case, economic growth is barely moving the needle. In a free market, each person can try to grow their own wealth pie, but, because of statist policies, people are experiencing more and more difficulty to find work in the first place, let alone grow their personal wealth. In South Africa’s case, the expanding government is gobbling up more and more of an ever-shrinking GDP. People are caught between a rock and a hard place, with very little prospect of improving their lives. This is inevitable when a government grows – it suffocates economic growth and people suffer more as time goes by.

There is nothing for the general population of the country to gain out of government bankruptcy and consequent poor service delivery. For instance, ending Eskom’s monopoly over the sale of electricity by allowing private generating companies to provide electricity to consumers would take a heavy load off of Eskom, the government and users of electricity. It would also remove the “electricity uncertainty” that hangs over the country, threatening electricity blackouts and driving away investors.

South Africa has very little economic growth nowadays, due to redistributionist policies and highly restrictive impositions on labor markets and small and medium businesses. The recent paper released by Treasury indicated that there are at least some in government who are aware of the right kinds of policies South Africa needs to head out of our current economic swamp. The resistance to the paper also shows that there are many who would rather focus on wealth redistribution and wealth destruction, instead of wealth creation.

Along with cutting government spending, our economic climate must be changed to one that invites investment and growth. None of us can buy a car or a house, or many smaller goods, with a bad credit score. The worse South Africa’s credit rating becomes, the lesser reason investors will have to take a risk on this country. And do not fall into the narrow, single-minded box of thinking we don’t need the ‘Western’ credit agencies and that their ratings mean nothing. No rational investor, from America, England, China, India, Russia, Kenya, Ethiopia, or Botswana, will invest in a country where their investment won’t grow.

Mhlanga also wrote that real economic growth “should be at least 2.7 percent sustainably over the long term” to stabilize the government’s debt. What can the government do to kick-start economic growth? Two main aspects:

(1) cut government spending immediately. If this is not done, government spending will spiral out of control and no welfare payments will be made in the future;

(2) make it easier for people to take on employees without being financially strangled by the National Minimum Wage. These measures may be bitter medicine to swallow, but it is the medicine that is going to have to be taken – and the sooner, the better.

The next time Moody’s speaks out on South Africa’s credit rating, the news will probably be more negative than their most recent comment.

Chris Hattingh is Project Manager, and a Researcher, at the Free Market Foundation. He has an MPhil in Business Ethics from Stellenbosch University. He is the author of published articles on consumer rights, economic freedom, inequality, and individual freedom.