THE BLOG

Why South Africa Is In 'Junk Status' -- A Short Explanation

If South Africa were a person, most banks and credible institutions would not lend to us, or lend at very high interest rates.

04/04/2017 15:02 SAST | Updated 04/04/2017 15:25 SAST
Siphiwe Sibeko / Reuters
South Africa's president Jacob Zuma gestures during the swearing in of cabinet ministers following a reshuffle that replaced Pravin Gordhan as finance minister with Gigaba along with various other ministers and their deputies in Pretoria, South Africa, March 31,2017.

Countries, like individuals, tend to depend on credit extension in order to meet the large and varied collection of needs. In South Africa, given our history, we have more needs and social demands that we have resources. In this sense, we often hear of the budget deficit, which is the difference between what we raise in taxes, and what we spend on various programs, from building infrastructure to paying social grants.

To highlight the problem of our social resources, recently we heard Tom Moyane, the commissioner of the South African Revenue Service, explain that South Africa had missed its revenue target by some R30 billion for the year 2017. This means that South Africa has a continued need to borrow in order to fully meet the needs in the national budget.

In order to be able to lend money to the country, those with saving or excess funds must believe that South Africa has both the ability and willingness to pay the money back in the future. These are critical considerations since they have distinct requirements.

Firstly, our ability to pay requires that as a country we are able to collect taxes in the future in such quantities that we can meet not only our debts, but also other social commitments.

This means the economy has to grow so that more people and more companies pay taxes into government coffers. When the economy is not growing, as has been the case recently, taxes fall and the country's ability to meet its obligations is constrained.

Countries have been known to choose not to pay despite being in a position to.

The second requirement relates to the country's willingness to pay. This really relies on the country's political framework and stability. Countries have been known to choose not to pay despite being in a position to. In these cases, a government may choose one priority over another. For example, a government may choose to finance its army rather than to pay its debt or pay social grants rather than pay interest on loans. Such an eventuality leads to a country defaulting.

Therefore, ratings agencies have to look at a range of factors and indicators which not only talk to economic factors, but also political factors to determine a country's creditworthiness. As we have experienced recently, political factors have been prevalent, and indeed have an influence on the economic situation of the country. For example, political tensions may lead to policies and programs not being implemented. A weak political system may lead to corruption, and thus critical resources leaking out of the system and not reaching intended causes.

Ratings agencies thus will assign a rating or ratings level in order to indicate to creditors and potential creditors what kind of situation they may face. The higher the rating, the more creditworthy a country is, such as A. The lower the rating, the less creditworthy a country is, such as B-.

As recently indicated by ratings agency Standard & Poor, South Africa is assessed to be of sub-investment grade. This means the country is below investment quality, or junk in popular language. If South Africa were a person, most banks and credible institutions would not lend to south Africa, or lend at very high interest rates. Indeed, this is what is going to happen to South Africa as a country as ratings agencies rate the country below investment grade, or junk.