By Adrian Fuller
The long and tedious wait for what had become an increasingly inevitable event, a sovereign downgrade by Moody’s, was finally over on Friday night, 27th March, removing a Sword of Damocles that had been hanging over our country’s head for years.
The downgrade, brought about by the deterioration in our fiscal growth, our low GDP growth and our deteriorating public finances, prompted knee-jerk selling of bonds. It is well documented that financial markets are forward-looking and are several steps ahead of rating agencies (the market priced in a downgrade a long time ago). Therefore, by 3pm on the following Monday, the effect of the downgrade was negligible.
The downgrade obviously occurred during an extremely difficult time for SA. Our markets are currently at the mercy of an oil price war, slow economic growth, and a pandemic that has thrown us into a deep recession – quantified by projected GDP growth of -3.5% vs our GDP growth of -1.5% following the Global Financial Crisis.
Although, during a ‘perfect storm’ like this, it’s difficult to be positive, we mustn’t ignore the fact that the low oil price, driven down by a price war and kept down by a substantial reduction in global demand, will act as a tax cut, thereby helping consumers and reducing SA’s inflation that could head towards 2.5% this year.
The crises have instigated gargantuan fiscal stimulus by the US which involves the potential injection of up to $5 trillion into the US economy. This wall of money has to find a home. Emerging market economies, offering relatively high yields (although ours has reduced due to recent interest rate cuts), should benefit from this to the extent that it could match the monies that are due to leave SA due to the credit downgrade…as long as we continue to impress the rest of the world with improvements including our President’s fight against corruption, the rebuilding of our Treasury, visa deregulation, the administration of our SOE’s, and the transparent and responsible handling of land reform. These improvements, together with the strength of our constitutional democracy, our independent judiciary, our free media and the soundness of our banks, have led to SA’s rating/ranking in the World Economic Forum’s Competitive Index to move from 69th to 55th between 2018 and 2019.
The impressive upward movement in the WEF’s ratings has been achieved by our President (together with his Cabinet) who, according to BBC World News, when commenting on SA’s response to Covid-19, “has emerged as a formidable leader – composed, compassionate, but seized by the urgency of the moment…”
I am grateful to President Ramaphosa for his leadership during this time. I look forward to being able to refer to Covid-19 in the past tense and to witnessing the economic improvements that, according to most asset managers, our country is capable of achieving over the next 5 years.
Thank you.
Adrian Fuller
