Credit ratings agencies have played a crucial role in determining the ability of governments, financial institutions, and corporations to pay up on time and in full.
Essentially, these institutions have contributed to investor perceptions and credit risk.
Standard & Poor’s, Fitch and Moody’s have been at the top of more than 70 agencies around the world, with a claim on 90% of the global market.
Eusebius McKaiser spoke to Political Economist Dr. Patrick Bond and Deputy Editor Financial Mail Sikonathi Mantshantsha to answer a few questions:
What are ratings agencies and why do they matter?
Bond: The three big one’s…. we are expecting Moody’s and Fitch to chime in this week and it’s likely that one or maybe both would also declare junk and that would create the sense in the international market where group’s like city bank, large emerging market funded investment companies in South Africa – and their junk rating would trigger an outflow probably on Friday of the big investors.
The big mutual funds, and pension funds, insurance companies - those guys that have huge amounts of capital flowing around and are looking for high-interest rates.
These three have had this big whip and one of them just whipped it out on South Africa.
What is the implication for me?
Mantshantsha: Your little pay has just gotten smaller.
The first thing, our fuel for our vehicles is paid for in dollars, that has now immediately risen as the rand is close to R14 to the dollar.
To get your food to the store, they will be paying more now for that diesel and they will get that money out of your pocket.
The fuel price cut you will get today is the last one for a long time.
Everything that happens moves on the fuel price and that is inflation and everything. That will then be followed by increases on the debt we owe to the banks that give us these cars, houses and personal loans we take. Everything will start rising as a direct result of this action.
Eusebius McKaiser: There are different attitudes toward ratings agencies in general. Does it help us to even critique S& P in terms of its history in terms of where it’s been found wanting before, having to pay penalties… should we just accept that for better or worse the cost of borrowing has just increased?
Bond: Let's make fun of them, but I think it’s critical to say that if there is a big fight in two huge blocs politically, let me call it the Zuptas - and they may have gotten hold of the State and are ready to loot it and land nuclear deals - all this kind of stuff is a valid concern.
But on the other hand the other bloc that has been around Pravin Gordhan in Treasury, they have been state captured by these ratings agencies and the big problem for them is that one of them went rogue yesterday.
Now those ratings agencies, we should be quite critical of them because they next two will do full junk.
The real interesting question is will Malusi do what he said on Saturday which is a left populist more expansive, more re-distributive project?
Mantshantsha: Whether S&P is an angel, all these ratings agencies are not perfect. The fact of the matter is the investors from which we borrow R 2.2. trillion at this moment which is more than 50% of our GDP, they contract these people to say tell us how South Africa is.
At this point, the verdict has been given.
It is not so much that the President has removed a trusted finance minister, it is the reason. Why have you removed him? Why have you put this guy here? You asked him to do what?
We all know the President wants the nuclear (which is about R1 trillion) and he has put a minister there that will do exactly as he is told.
Regardless of the fact that we don’t have money, that we have over-borrowed to consume...That is the problem here.
What is the correct action to be taken to make a correction?
Mantshantsha: Our economic problems now start from the political problems, the start is right at the back, the Constitution. It gives far too much power to one person.
Now the President looks around and tells you it’s my constitutional prerogative to appoint ministers.
We have people like Jacob Zuma, who has no clue what is going on with the economy, expecting what he wants from it.
And for that, he has removed a finance minister who has refused and has been obstructing his plans and now he puts a minister who says I simply comply with the instructions of the president.
After removing the president you fix the Constitution and put mechanisms in place.
Take a listen to the full interview...
This article first appeared on 702 : What being downgraded to junk status really means