CAPE TOWN, South Africa — In April, the credit rating agencies Fitch and Standard & Poor downgraded South Africa’s credit rating to “junk” status. South Africa’s credit rating downgrade is part of a brewing crisis in the country.
A country’s credit rating is important because it indicates to international creditors the risk of lending to that particular country. Governments borrow money by selling bonds to investors with the promise of repayment with interest. A downgrade, particularly to “junk” status, will likely make it much harder for the South African government to borrow money on the international market, which has ramifications for the South African economy and its people.
South Africa’s economy expanded a meager 0.3 percent in the full-year 2016, compared to 1.3 percent in 2015. The mining and agricultural sectors were the largest negative contributors to growth. The impact was largely the result of lower mineral prices which affected production and severe droughts which impacted food production and output. Economic growth is expected to decrease continuing into 2017 due to weak commodity prices and increasing domestic political issues.
Since 2015, protestors against the South African president, Jacob Zuma, have called for him to step-down, popularizing the slogan “Zuma Must Fall.” Zuma’s reputation has been tarnished by reports of corruption and mishandling of public money. Instead of infrastructure and development projects, public funds have been used to bail out state-owned institutions that arguably do little to help the average South African. The misuse of public funds and allegations of corruption have caused consternation at a time when a quarter of South Africa’s workforce is unemployed.
Inequality in South Africa is among the worst and most consistent in the world. According to the World Bank, the top ten percent of the population holds 58 percent of the country’s income, whereas the bottom 50 percent of the population accounts for less than eight percent.
South Africa’s credit rating downgrade has the potential to further exacerbate the current economic and political tensions. The credit downgrade increases the risk to investors and therefore, to encourage investment, the South African government must offer larger interest rates on government bonds to encourage investment and stabilize the currency.
The increased interest rates offered on government bonds must be paid for through tax revenues. As a result, the government will have less money to spend on developing the economy and improving the lives of its citizens. Private sector equities and direct investment will also be affected, again, because of the increased perceived risk to invest in South Africa.
In 2013, the South African government launched its National Development Plan (NDP) which aims to reduce inequality and eliminate poverty in the country by 2030. South Africa’s transport minister Joe Maswanganyi recently reaffirmed his department’s commitment to the NDP and acknowledged the importance of infrastructure to economic growth. Cooperative governance and traditional affairs deputy minister Andries Nel also recently spoke of the importance of reviving rural areas and creating a more balanced economy in order to achieve the goals of the NDP.
South Africa’s credit rating downgrade puts further strain on South Africa’s already weak economy and puts the success of the NDP in jeopardy. Despite this, government ministers are publicly reaffirming their commitment to reducing inequality and eliminating poverty in South Africa. Hopefully, their sentiment can be translated into real action in the face of the latest blow to South Africa’s economy.
– Michael Farquharson