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Has SA done enough to avoid S&P rating downgrade?

Things we need to do to possibly get a permanent stay on a downgrade – Stuart Theobald, chairman – Intellidex.

SIKI MGABADELI:  Tomorrow we are going to hear our ratings fate from agency Standard & Poor’s. It seems that many are hoping for a reprieve until at least later in the year around November to at least give the government some time to show that it is committed not only to fiscal proprietary but to implementing it. But what’s the long-term future for our economy? What are the things that we need to do now to possibly get a permanent stay on a downgrade to sub-investment status? Have we done enough for tomorrow?

Let’s chat to Stuart Theobald, who is chairman of Intellidex. Stuart, thanks for your time this evening. In fact you wrote a very interesting piece for The Investor magazine which is going to be coming out from Moneyweb on particularly this issue – looking at all the efforts that Treasury, business, labour, have been engaged in since the beginning of the year.

STUART THEOBALD:  Hi Siki. It’s a remarkable thing which has happened, which I don’t think people have really noticed and understood the implications of. The [threat] of the downgrade has really brought together labour, business and government in a way that has never happened in our democratic history.

The roadshows that have been conducted internationally have had the top of our business leadership, together with secretary-generals from our key labour movements, as well as the minister of finance and other key government figures going together, going and sitting in meetings with key investment players in London, in New York and elsewhere, all with a united front to convince the international community that we are taking the right steps to change the trajectory that the country is heading in and to really crack the structural barriers that are holding our GDP growth rate down to deliver the kind of stable policy environment that international investors need.

It’s been a remarkable effort. I talk about the roadshows, but there have also been a whole series of meetings that have been held with Standard & Poor’s, with Fitch, with Moody’s, that have been held with labour, with government, with business. In South Africa there have been conference calls with investors from around the world – that united front to try and avert the downgrade has actually been an unprecedented thing in our history.

SIKI MGABADELI:  Not only that, but beside the conference calls and the roadshows and the meetings, they’ve also formed specific working groups to look at and target specific areas. Is that going to be the true test of those new partnerships – to see firstly what comes out of those individual groupings, and the implementation of those particular recommendations?

STUART THEOBALD:  I think the ratings problem is a short-term problem, but it’s intimately tied with a long-term structural problem which is how we get this economy growing faster.

Now, there are two things that affect our ability to repay debt, and that’s what the rating agencies are focused on. One is if we have the will as a government. Do we run the accounts properly, do we ensure that we don’t go too deeply into debt, do we ensure we are creating a policy environment that allows businesses to do well and pay taxes? So that’s the one question. Do we have the will as a government?

But the other question is whether the economy is capable of growing, whether it’s capable of delivering the kind of tax revenue that you need. And an economy that’s shrinking for all the will in the world will leave a government unable to pay its debts, and that’s the bottom line.

So you’ve got to get these two stories right. Treasury’s job has to be to convince the world that the will is there, the policy environment is there. The next big job is to convince the world that we do have the fundamental economic ability to grow the company in such a way that we will generate the kind of revenue that supports government spending and therefore ensure that we are, long term, able to service the debt that we raise in international capital markets and the bonds that government issued.

So, to get the growth story right, we’ve got to have a credible long-term vision of just how it is that this economy moves to another growth path.

Those working groups that you’ve mentioned – there are three of them. One is to deal with the short-term problem of the rating downgrade, making sure that we put the right story forward to people doing those assessments. But the other two groups are about that longer-term structural barrier to a high growth path for the country.

So one of the groups is focused on small and medium enterprises and the other is focused on bigger existing industries. Both industries are in trouble, like manufacturing and mining – but also industries where we have real growth opportunities like tourism, like the export of business services. And how do we both protect those industries that are vulnerable, and then also stimulate the industries that really do have massive opportunities to drive growth in the country?

SIKI MGABADELI:  What do you think is going to happen tomorrow?

STUART THEOBALD:  I think it’s incredibly close. I like to be optimistic and think that Standard & Poor’s will see the will, will buy into the vision that we have to deliver a higher growth path.

But I think the sensible outcome will be to say we won’t downgrade, we see that these efforts are being made, but we are going to watch carefully. So they’ll come with a negative outlook and say, well, we’ve heard your story but we have to see delivery.

Ultimately delivery is what matters. Are we going to deal with long-term problems like the MPRDA Amendment Bill that has really sat like a big wet rag over our mining industry and prevented billions of rands of investment from happening? Is that finally going to be solved? With problems like that, if we can talk the talk and be convincing, that’s one thing. But we’ve only go to follow it up. We need to see key things like dealing with the MPRDA Bill, among other things. So labour reform, dealing with the state-owned enterprises – all kinds of things need to come right. We’ve got to deliver on those.

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