Ratings agency Moody’s came up with some mildly positive news for South Africa over the weekend. It kept South Africa’s foreign and local currency credit ratings at Ba2, but changed its outlook from negative to stable. A period of strong commodity prices has boosted South Africa’s Government tax revenue, and Moodys points to some success regarding Government’s fiscal consolidation measures and an expectation that the Government debt-to-GDP ratio will stabilise around 80% in the medium term.
Any such positive news from a ratings agency is welcome, for a country languishing in territory below investment grade, and it does serve to remind us that we must not merely expect a trend to continue for ever in one direction downwards (or upwards for that matter). Life generally goes in cycles. But could this be the turning point for South Africa’s credit ratings? It is far too early to tell.
Firstly, Moodys makes mention of external factors contributing positively to Government revenues recently, notably strong commodity prices that boosted mining company profitability. But there is also a myriad of uncertainties regarding Government expenditure commitments.
Social welfare spending pressures are enormous, and not the type of pressure that can easily be ignored should they produce nasty “upside surprises” for Treasury, especially not in an environment where the unemployment rate has just gone above the 35% mark and rising. Social unrest and potential of resultant economic volatility is never far away in an environment which is highly unequal and high on poverty.
There is also the issue of ageing infrastructure in South Africa, with economic infrastructure investment by government weakening sharply as a percentage of GDP as far back as the late 1970s, and never having recovered significantly since. High on current expenditure, “fiscal consolidation” continues to translate into a budget very low in capital expenditure. Infrastructure spending surprises become more likely as infrastructure ages and sometimes crumbles.
And then there is the myriad of state-owned enterprises, many in disarray, some of them crucial, such as the electricity and transport utilities to name but two. Unexpected fiscal support also remains a key risk to Government finance in such times.
The bottom line is that I would be wary of getting too optimistic until we have seen meaningful improvement in microeconomic management in certain key industries, notably Electricity and Transport, but not only those. Large parts of the Education and Health Care Sectors are also in need of improvement, and for as long as such crucial sectors of the economy are battling with their management capacity, unpleasant fiscal surprises are always a real possibility.
The reality is that Government is overstretched, committed to too many areas of the economy, with resources too thinly spread, and weak micro-economic performance ultimately adds up to weak macroeconomic performance. Some would say that a skills shortage is at the heart of the problem, and I would concur that good skilled labour is in short supply should South Africa want to harbour ambitions of being a far bigger economy than what it is today.
But I do believe that it is possible to do far better with what we have, should the set of incentives in certain sectors of the economy be changed meaningfully. The broad approach in my view should be for a “regulatory vs delivery split” between Government and the Private Sector, Government focusing on being a good regulator, and the Private Sector delivering the goods and services in a well-regulated competitive environment. In the highly competitive and professional industries of professional sports, this is more-or-less the split that we see. FIFA or the IRB (or others) are relatively small organisations as far as numbers of staff go. They focus on trying to regulate the sport well. It isn’t a free market. Far from it, free markets can be a “free-for-all” that often end up being monopolistic and not so free. The games are highly regulated, including on-field and off-field rules and referees, disciplinary codes and anti-doping measures. A lot of attention goes into structuring the competition to get the best out of people, teams and individuals of similar standards being grouped together in segregated competitions, the idea to protect and develop new talent (entrants) and those of lesser ability of experience without “crushing” them.
In South Africa, operating within the same labour laws that many criticise as being too onerous, the Financial Sector is often rated in competitiveness reports as one of the better ones in the world. How is this possible? I believe the recipe is well-regulated competition. In markets with significant competition, Retail being another big example, the standards of service at the southern end of Africa have often shown to be impressive. This is the broad approach that I believe should be rolled out to other key sectors, and can achieve significant improvement in economic performance…. “well-regulated competition”, with the regulator and competitors at healthy arms’ length from each other, Government focusing on designing and implementing the most appropriate competitive structure and regulatory environment for each industry, with the Private Sector being the competitors and “playing the game” within these regulatory frameworks. Government would likely be significantly smaller in size, and able to better focus its resources, while private investment would be allowed, and likely forthcoming, into a larger part of the economy.
There are some limited signs of a shift in this direction, the sale of a share of airline SAA, and Transnet Freight Rail opening to third party operators. One hopes that it isn’t too late, given the crumbling state of rail infrastructure, but bigger Private Sector involvement seems the only plausible way to improve the stage of Government finance more sustainably and convincingly.
A small improvement in a Moodys Outlook does remind us that life does work in cycles of varying length, not in never ending straight lines up or down, and that there is a glimmer of hope for a turn for the better. But too much still rests on good fortune, such as commodity price cycles going the right way for us, and we know that such markets are highly cyclical.
More meaningful economic structural reform for a more resilient and better performing economy over the long term is required before we can be optimistic about a sustainable turn for the better.
