Policy, Law, Economics and Politics - Deepening Democracy through Access to Information
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25 April 2014
   
 
 
 
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On Friday, Standard and Poors downgraded its credit rating of US government debt from AAA to AA+. Although this is a relatively small adjustment, it has accelerated an already steady plunge in stock market prices across the world, starting on Asian markets this morning. Under these conditions, there is growing concern that the much feared double dip recession is a highly probable outcome in developed economies in the US, UK and Europe, where the damage from the sub-prime bubble burst was most significant.
In Europe, the public finances of Spain, Portugal, Ireland and Greece could not withstand the pressure of the debt crisis and they came close to being unable to service their debt obligations. This is extremely serious given that sovereign debt is, under usual circumstances, considered to be one of the least risky investment asset classes and often underpin portfolios held on behalf of risk sensitive investors, such as pensioners, including those in South Africa. Italy has now joined the other “PIGS” as potential defaulters. As Euro currency participants, they have the benefit of richer Western European economies offering bail-outs and debt restructuring to prevent damage to the Euro, and their own economies, but their capacity to do this is limited for economic and political reasons. The USA narrowly averted default on its sovereign debt during a political stand-off, but the subsequent downgrade that could have been avoided with better policy choices will increase the cost of its debt.
These troubling events in the global economy need steady responses from our government to prevent a deepening economic crisis at home. It should consider the fact that South Africa is an emerging market destination – with relatively strong infrastructure at the gateway to a potential market of almost 1 billion people on the African continent. It remains possible for South Africa to position itself as an attractive destination for long term investment capital, but we need to be desirable to extremely nervous investors. Investors need confidence that our economy will grow. To determine medium to long term growth potential, they consider predictive indicators such as potential future economic activity – usually driven by a well educated workforce within an environment that facilitates the economic activity that generates growth. Under these circumstances wealth increases and unemployment decreases.
Before the crisis, we were already on a low-growth trajectory. Our trajectory lagged behind those of comparable economies and we missed the commodities boom because government’s economic policies acted as a barrier rather than a boost. The impact of the initial crisis, the precarious jobless recovery and now a potential double dip recession in Western economies is severely detrimental to our economic outlook.
Under these circumstances, government must act. It must firstly do no further harm. Our already fragile economy is being hammered by mindless calls for nationalisation that are doing irreparable damage to our attractiveness as an investment destination and creating new roadblocks on the path to prosperity for all of our people. Government must be alert to the minefield of slowing global growth, falling stock markets and the real possibility of sovereign debt defaults in Europe and respond appropriately by ensuring that our public finances can withstand the increasing pressure. It can do this by taking decisive action to stop the enormous leakage from the fiscus through inefficient spending and tenderpreneurial scams that rob the poorest members of our society. It needs to be clear on the fact that when an economy slows, tax revenues do too and, given that we are already in deficit, there is very little space for manoeuvre. Under these circumstances, economic policies need to be coherent and focussed on building, not breaking down, our economic prospects.
However we have far more space to manoeuvre than the hopelessly over indebted economies at the brink of default. When economic paradigms shift, opportunities arise and there is no doubt that South Africa can emerge given appropriate choices. We need to reconsider the structure of our economy; how it can be more inclusive to the aspirations of all South Africans and how best to leverage our unique position in the global economy to best advantage for all of our people, now, and for our future generations.
 

Edited by: Creamer Media Reporter
 
 
 
 
 
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