Propery & Wealth

Credit junk status’ real bite still to come?

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Just what does the sovereign credit down grade to so-called 'junk status' mean for the overall outlook of the property industry and wealth building in South Africa?

To supply our readers with an informed and balanced insight into the news – which is core to the mission we set ourselves – amid the information and opinion overload, which has become typical of today, to answer that question is no easy task.

One is perpetually confronted with highly complex factors and interlocking processes, which makes a clear, single “snapshot” almost impossible, but let’s try to get some handles on what this thing called “junk status” mean.

To start with, what exactly does the much-discussed downgrade to junk status by S & P Global Ratings and by Fitch actually, at its very core, means?

It simply comes down to the investment status South Africa is accorded by the agencies, banks, other countries, and institutions it calls on for financial- loans, -investments and -support from time to time.

This status defines South Africa's perceived risk levels as an investment destination for the millions in available investment funds, commonly referred to as FDI, or foreign direct investment.

The upshot of our present status has been to pin SA's fiscal- and growth path at a higher perceived risk level than before – the direct consequence being that our debt attracts higher interest and new loans become more expensive, to offset lenders perceived higher risk.

Why that is important?

It is important simply because the mission of government should be, in economic terms, to increase the prosperity of it citizens (and all those who live here) and ensure that all enjoy basic rights to accommodation, food, health and jobs – which, sadly, South Africa cannot afford to provide to over 50% of its inhabitants right now.

In a written response to a question in Parliament, the Minister of Economic Development, Ebrahim Patel, is on record as stating that the recent downgrades were "bad news for our efforts to grow the economy at a faster and more inclusive level.

We need to take steps to ensure that we regain investment grade status from lenders and pursue a credible, bold, inclusive growth strategy in the interest of our people, he said. 

The point being, at our present pedestrian growth rate of 1% per annum, it takes roughly 12 years to double the size of the economy whereas, at an annual growth rate of 10%, it would only take about 7 years to do so.

And, that is what SA needs if it is to provide the employment required by those presently looking for work and, amongst others, to absorb the next 750 000 matriculants expected to enter the job market in December this year.

Simply redistributing existing wealth and income will just not do the trick. What is needed is much more new  opportunities and wealth,created by productive growth and ensuring that people are empowered, amongst other by focused education and training, to take-up those job opportunities and accumelate wealth.   

Where we stand presently

Where do we stand presently as an investment destination in the international community?

The good news is, despite the just downgrade to junk status, that on the 2017 AT Kearny FDI Confidence Index, South Africa has just made it back onto the list at number 25 – of 25 countries listed – having been 15th in 2013. So, we are not totally out of the investment destination league just yet.

In a nutshell, this index is the result of an annual survey of global business leaders that ranks which markets are projected to attract the most investment over the following three years.

 It is a survey which forecasts the top destinations for future FDI and, in the case of South Africa, all is not lost, but we are a long way from being out of the woods.

Importance of FDI

Just so that the importance of FDI is understood: South Africa has a substantial deficit on the current account of its balance of payments, and as a result relies on, at least, an equally sizeable inflow of foreign capital to finance that shortfall and keep its financial markets liquid.

It is worth remembering that,, at the end of the day, it was the lack of reliable FDI that brought both apartheid to its knees and which directly led to the fall of the so-called Iron Curtain around the Soviet Union.

And, there is where the real bite of junk status might still come. It is especially important to note, and consider, the fact that while South Africa still make the AT Kearney report’s FDI-list, the report does not paint a picture of the country as a foreign investment destination, that is at all that rosy.

It does encourage investors to view South Africa as a leader in Africa and a highly rated emerging regional market with a large workforce that for instance, has made investments in the local Motor Industry worthwhile.

However, the report also highlights the risks of its volatile exchange-rate, continued governance issues, high unemployment rate, low infrastructure investment by government and a generally decreasing trust deficit in South Africa's political leaders.

The simple and immutable lesson for government in all of this is that a sound economy depends on a stable political environment – a terrain on which very dark storm clouds seems to be building alarmingly fast.

by Eve van Basten

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