Over the past two weeks South Africa has been gripped by fear of “Junk Status”. On Friday, 31 March President Zuma dismissed Pravin Gordhan as Minister of Finance, and appointed Malusi Gigaba in his place. On Monday, 3 April Standard & Poor downgraded South Africa to ‘junk status’. Another credit rating agency (CRA) called Fitch also downgraded South Africa’s debt on 7 April. Since these downgrades, the main topic of discussion has been the terrible consequences that will follow this downgrade to ‘junk status’. In particular, it has been stressed by all spokespersons of different organisations that the poor will suffer the most from this ‘junk status’. But what is ‘junk status’ and what are CRAs? Why are South Africans afraid of ‘junk status’? What will happen to the poor now that the country has a ‘junk status’? And will junk status be reversed if the lives of the poor are improved?
Credit rating agencies
CRAs are like credit bureaus. Most working class and middle people know that when they apply to buy something on credit, companies will contact credit bureaus to check whether they are ‘credit worthy’ or are good customers. The credit bureau will tell whether you have skipped payments in the past, whether you are paying your current debts, how many other debts you have and your employment history. The company will use this information to decide whether to grant you credit. In most cases, you will find that if you are poor and you have not worked for long, the company will be worried about your ability to pay. It will therefore impose a higher interest rate so that if you fail to pay in future it will have gained enough money from you to recover the loan.
CRAs are like credit bureaus, but they do credit checks on governments, state owned enterprises and big companies. When governments and these big companies want to get credit from other companies and banks, these organisations will look at the report from CRAs in order to decide whether to give the loans or what interest rate to charge on these loans. The CRAs compile a report where they indicate whether they think you are going to be a good payer in future, and give you an ‘investment grade rating’. If they think you may not pay your debts in future they give you a sub-investment grade, and this is sometimes called ‘junk status’. Similar to the companies that loan you money, the ones that loan the government money may decide to ask the government to pay a higher interest rate because of ‘junk status’.
Capitalism and debt
CRAs have become important organisations because of the use of credit to finance the work of many companies and governments. Companies need credit to start businesses and to finance large projects. These companies use their profits in future to pay back the loans. Governments also need loans to finance large projects, and to finance shortfalls in their budgets. Governments use profits from state enterprises and taxes to pay back the debt. As capitalism has grown so also has the use of debt to finance projects and operations. Governments like that of the United States owe debt that is larger than the income of the whole country. They pay for this debt by borrowing more debt. It’s like going to one mashonisa to borrow money to pay another mashonisa.
CRAs have a long history that goes back to the 1850s, but it is since the 1970s that they have become more powerful. Up to the 1970s many governments used regulations to protect funds owned by the public, like pension funds, from being lost or abused by the large companies that need loans. Governments know that if the pension funds are lost this will lead to a political crisis and government may even fall. As the need for credit has grown the large companies and governments have used CRAs to justify borrowing money from pension funds and other public savings. In the United States for example, the law said that a company or government can only borrow money from pension funds and other public savings if it was an ‘investment grade’ company. CRAs have a very close relationship to the large banks and large companies, and they give them an ‘investment grade’ rating so that they can facilitate access to these investment funds. The same thing happens for the United States government. Although the United States government does not have enough money to pay its debts, and is therefore bankrupt, the CRAs do not give it a ‘junk status’ since they are afraid this will crash the whole of capitalism. So the US government always gets an ‘investment grade’ rating from the CRAs.
CRAs police less powerful states
Since the 1970s the United States government and the large companies in the US have promoted a set of policies known as economic structural adjustment programmes (ESAPs) or neoliberal policies. The policies include privatisation of state enterprises, lowering workers wages, casualisation and outsourcing, cutting back state expenditure on social services like health, education and so on. These policies also force governments to focus their economic activities on providing cheap exports to the big capitalist countries, and to also force them to replace their local industries with imported goods. The United States has used the World Bank (WB), the International Monetary Fund (IMF) and the CRAs to police governments and ensure that they follow the neoliberal policies. If governments refuse to follow these policies, or if the WB, IMF, US and the large global companies fear that there may be changes in policy that threaten neoliberal policies, the CRAs give them ‘junk status’. According to the CRAs, they say there is “policy uncertainty” when they think governments will not follow neoliberal policies.
Junk status and the poor
Although the main aim of giving governments ‘junk status’ is to force them to keep to neoliberal policies, the CRAs and their supporters try to get public support by focusing on the impact of the ‘junk status’ on the poor. The supporters of CRAs and neoliberal policies claim that ‘junk status’ will impact on the poor because a ‘junk status’ will lead to increases in prices, higher interest rates, and that the government will have less money for social services as a result of more money going to debt repayment. This however is not always true. According to Tembinkosi Dlamini and Ronald Wesso, researchers at Oxfam South Africa, a ‘junk status’ for the government does not automatically mean that there will be less money for social services. “…government can look at reducing fruitless expenditure, reducing corruption in the public service and closing loopholes in the tax system that allow multinational corporations free rides”, according to the researchers. Dlamini and Wesso also look at other things the government can do to improve the lives of the poor, even when the CRAs award South Africa ‘junk status’.
Increasing poverty and fear of ‘junk status’
Since the dawn of democracy the South African government under the ANC has adopted policies that have pleased the WB, IMF and the CRAs in order to avoid ‘junk status’. The real wages of workers have been falling since democracy; the government has promoted privatisation; its focus has been on exports and this has led to important industries like textile collapsing; no investment has been made in important infrastructure and so on. The government has adopted these policies, which have impoverished the working class, as part of avoiding a downgrade to ‘junk status’. The government also knows that if it puts in place a massive programme of improving social services and if it stops privatisation it will get a downgrade to an even lower ‘junk status’. The ‘junk status’ that South Africa has got from the CRAs is to warn the ANC government and to encourage it to assure big capital and the international organisations that it will stick to neoliberal policies.
The corruption of President Zuma and his allies in the ANC, which is a serious problem for the working class, is being used by the supporters of neoliberal policies to keep the ANC on the neoliberal road. The CRAs are not mainly worried about corruption. Rather, the fear of the CRAs is that with Pravin Gordhan gone the ANC may abandon neoliberal policies. The important thing to understand about ‘junk status’ is that if the working class pressurises the ANC or any party to focus on improving the lives of the poor and not to focus on profits, then the CRAs will downgrade South Africa to an even lower ‘junk status’. The CRAs will only lift the ‘junk status’ if they are satisfied that the interests of the rich are protected.
This article first appeared in Karibu, March-April 2017 edition. Karibu is a working class newspaper produced by Khanya College.