Third ratings outlook downgrade: Holding the fiscal line is not enough; Treasury needs to show it can implement reforms

They say that one may be a fluke, two could be a coincidence, but three is a trend. 

So it is very concerning that Standard and Poors yesterday became the third of three major ratings agencies to downgrade the outlook on South Africa's sovereign credit rating.  In January this year Fitch changed their outlook to negative following Moody's, which changed theirs downward in November 2011.

The credit rating agencies have similar motivations for their decision: they give National Treasury credit for holding the line on fiscal policy, but they base their downgrades on the increasing political risk linked to competing ideological interests within the governing party. 

These interests, which shift depending on which candidates happen to be seeking high office, create a policy logjam at the highest level of government. They lead to the publication of conflicting economic policy documents by different factions in Cabinet and compromise government's ability to tackle slow growth and our unemployment crisis.

When Finance Minister Pravin Gordhan proposes reforms to tackle some of these problems he is shot down by Cosatu. Last year he announced a Youth Wage Subsidy to be implemented this Sunday, but the policy remains blocked by Cosatu at Nedlac. Earlier this month he proposed "labour market reforms" to "directly improve employment by providing flexibility and the right incentives to work", but Cosatu responded by publicly asking the President to "give the minister a call to tell him to stop sending out these messages".

If this trend in revised outlooks leads to credit rating downgrades there will be a significant negative effect on the South African economy, and all South Africans, in terms of increased borrowing costs. But if the Finance Minister wants to prevent this from happening he should stop arguing with the rating agencies by defending National Treasury's ability to hold the fiscal line and start demonstrating that he has the political capital to implement the policies he proposes. If he fails to do this, the South African economy will pay the price.

Statement issued by Tim Harris MP, DA Shadow Minister of Finance, March 29 2012

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