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South Africa: Populism Riskier Than Slowdown, Warns S&P

Mariam Isa

5 December 2008

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Johannesburg — POPULIST changes in SA's economic policies, rather than a widely expected fall-off in growth, could undermine the country's credit rating next year, rating agency Standard & Poor's (S&P) warned yesterday.

The global recession and plunging commodity prices would make the year very "challenging" for SA, and it would be hard to achieve the 2,5% growth rate forecast by the agency, said Konrad Reuss, S&P's MD for SA and sub-Saharan Africa.

But he said that whether SA slipped into a recession or not was not an issue for the country's BBB+ investment-grade credit rating, to which S&P gave a negative outlook last month.

"The key issue which we are concerned about is not the slowdown in the economy but the policy response. An unorthodox or populist response to slower growth would create vulnerability. Investors would take fright and look at SA in a more negative way," he told reporters.

The new leaders of the African National Congress (ANC) have said repeatedly that SA's policy cornerstones -- which include prudent fiscal strategy, an independent central bank, and inflation targeting -- would remain after elections next year. But there is rising concern that the global financial crisis will prompt SA's new leaders to spend freely next year, creating more borrowing costs for the government.

The ANC's left-wing allies, the Congress of South African Trade Unions and the South African Communist Party, want more spending to help alleviate poverty.

"The debate about a basic income grant and widely expanding eligibility for government grants would, in the medium to long term, be a concern. We hope the next government understands the dynamics and the vulnerability," Reuss said.

SA yesterday formed a task group that includes the government, trade unions and business to help mute the effects of the global economic crisis.

Reserve Bank governor Tito Mboweni told journalists last night that a lot of "hard work" lay ahead next year.

"If what I hear is anything to go by, we need lots of prayers which I will be glad to lead."

Mboweni said central banks "must not take their eye off the inflation ball" but must also consider the global crisis in their monetary policy decisions.

"Most central banks see their primary mission as price stability, what use is that in the context of the economic and financial crisis?

"I'm confident my colleagues in the monetary policy committee will take into account the global and financial situation" when they meet next week.

Reuss said events in the first half of next year -- including the national budget and the election -- would provide the kind of "visibility we need to look at SA's outlook and where the rating should go". S&P had made it clear what sort of policies would support SA's rating, what would shift its outlook back to "stable", and what would lead to a downgrade, he said.

The South African Chamber of Commerce and Industry (SACCI) said yesterday that business confidence would remain "tentative" despite a 2,5-point rise in its business confidence index last month.

Growth faltered to 0,2% in the third quarter as retail sales, mining and manufacturing contracted. Thousands of jobs are being shed, particularly in mining and factories have put in their worst performance in nine years .

Cuts in interest rates would not be a panacea for growth, given their lagged effect, Reuss said. "It would be naive to believe that in this global slowdown ... rate cuts would automatically lead to a resumption in growth."

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