It will be necessary for South Africa to institute a number of structural reforms to the economy to get it back to an "investment grade" ratings. These reforms must cut right across the economy, from government spending to education, according to experts.
On Monday night S&P Global announced that it had lowered long-term foreign currency sovereign credit rating on the Republic of South Africa to 'BB+' from 'BBB-', or the dreaded 'sub-investment grade' or 'junk status'. This was after President Jacob Zuma reshuffled his Cabinet last week, removing Pravin Gordhan from his position as finance minister. Later in the week, Moody's said it was delaying its own decision by one to three months.
While the news in of itself merely confirmed the long-term negative trajectory of the economy, the ramifications more immediately are likely to be political. However, the country does face a mammoth task in returning the economy back to a positive growth pattern. It grew by 1.4% in 2014, 1.3% in 2015 and only 0.4% in 2016, escaping recession only by a whisker (some economists believed that the country was in a recession last year, even if the figures don't fit the technical definition).
The good news is that there are examples of countries that achieved remarkably short turn-arounds, after a junk status rating by S&P. In the late 90s, South Korea achieved this turnaround within two years. The bad news, at least for South Africa, is that the Asian country could achieve this remarkable turnaround thanks to a top-down style of leadership that concentrated a tremendous amount of power in the hands of the presidency (Park Chung-hee, the military general who was president from 1961 till 1979, ruled as an outright dictator).
"The most immediate challenge to the presidency of Kim Dae-jung, the task that will define his legacy, is the reshaping of Korea Inc," reported the New York Times in 1999, as South Korea slowly pulled out of its economic slump.
"To do that, Mr. Kim has been engaging in a shoving match with the top Korean conglomerates, known as chaebol. The chaebol have long dominated the economy and enjoyed close ties to the government, in the kind of crony capitalism that helped bring the economy to its knees last year. Now, Mr. Kim is trying to cut them loose and force them to slim down. He has ordered them to restructure, reduce debt levels, stop guaranteeing debts of affiliates, and focus themselves on key businesses while getting rid of unrelated ventures," said the NY Times.
This is precisely what South Africa needs to do, said Dr. Azar Jammine, director and chief economist at Econometrix. South Africa needs to stop the drain on the fiscus caused by endless bailouts to poorly-performing state assets, and the country also needs to educate its way out of the crisis.
"The constant bailouts to state-owned enterprises are an impediment to our ability to control public debt. The ratings agencies have mentioned this many times, especially Eskom and the South African Airways. Government has to keep guaranteeing its debt obligations due to mismanagement, and it means we can't keep public expenditure under control," he said. In October last year, Gordhan said in his medium-term budget policy statement that the net debt ratio would peak at almost 48 percent.
"What is very important to ratings agencies is our overall debt levels. Gordhan had actually done a very good job of keeping the trajectory of our national debt levels stable. At the moment, nobody in government seems willing to stop the constant SEO bailouts," Jammine said.
The options for these poorly-performing SOEs is either privatisation, or a complete sell-off, he said, as these are not assets as far as the public purse is concerned, but heavy liabilities.
A new worry for ratings agencies is the new Deputy Finance Minister Sfiso Buthelezi, according to Dr Co-Pierre Georg, senior lecturer with the African Institute of Financial Markets and Risk Management at the University of Cape Town. Part of his job is overseeing the Public Investment Corporation, which manages government pensions, and is the single biggest market investor in the country (it had a capitalisation of R1,8 trillion in 2016).
"Since the pensions are government-guaranteed, there is a concern that the Treasury is exposed to massive claims in the future from the PIC," Georg said.
What South Africa needs to do is to refocus its energies on education.
"There is a real problem with a concentration of power and wealth in the hands of a small minority. This feeds into the 'white monopoly capital' talk. But it's a fact that monopoly capital is a problem," Jammine said.
"A lack of education feeds into the massive income disparities you see. It also makes it less likely that people will start small businesses, which is where most job creation happens. We need to improve public education at all levels. Without progress on that, we won't be able to fight against inequality, and to raise the employability of the population," Jammine said.
The real task for South Africa is to get its political house in order, which will be the foundation for an economic turnaround. The uncertainty around the country's ability to pay its debts stems in part due to the perception that there is no political will to stem the ballooning debt problems, and no will to institute the kind of reforms that can drastically improve education and the management of public assets such as Eskom.
How the country brings that kind of political leadership into the executive will be the defining question for generations to come.