tag:theconversation.com,2011:/global/topics/sandp-7287/articlesS&P – The Conversation2017-05-07T12:41:01Ztag:theconversation.com,2011:article/771942017-05-07T12:41:01Z2017-05-07T12:41:01ZZuma’s attack on capital is digging South Africa into a deeper hole<figure><img src="https://images.theconversation.com/files/168106/original/file-20170505-21018-1exv774.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">REUTERS/James Oatway</span></span></figcaption></figure><p>South Africa’s governing party, the African National Congress, is adopting a dangerous political approach used in failing states like Algeria, Zimbabwe and Venezuela. Its aim is to deflect attention from its <a href="https://www.project-syndicate.org/commentary/south-africa-zuma-knowhow-shortage-by-ricardo-hausmann-2017-03">policy failures</a> and from numerous scandals surrounding President Jacob Zuma, his <a href="http://city-press.news24.com/News/the-rise-and-fall-of-duduzane-zuma-20160409-2">family</a> and the politically connected <a href="http://www.bbc.com/news/world-africa-22513410">Gupta</a> network.</p>
<p>The approach was allegedly crafted by <a href="http://www.timeslive.co.za/sundaytimes/stnews/2017/03/19/White-monopoly-capital-chosen-distraction-in-PR-strategy-to-clear-Guptas1">Bell Pottinger</a>, a London based public relations firm. It focuses on two concepts. </p>
<p>The first is the term “white monopoly capital”. The phrase <a href="http://www.timeslive.co.za/local/2017/03/11/What-exactly-is-%E2%80%98white-monopoly-capital%E2%80%99-Mzwanele-Manyi-offers-a-definition">broadly refers</a> to control of the economy by apartheid beneficiary capitalist oligopolies at the expense of South Africa’s black majority. </p>
<p>Accompanying it is the term “radical economic transformation”. This is defined differently by various senior government officials. But is <a href="http://www.702.co.za/articles/251821/so-what-exactly-is-radical-economic-transformation">understood to mean</a> rapidly changing the economy’s ownership, control, and production patterns in favour of the previously disadvantaged.</p>
<p>However, beyond damaging South Africa’s social fabric, framing the country’s current economic impasse in such a dichotomous politically charged way has negative consequences. </p>
<p>Firstly it distracts attention from the private sector’s real sins. This makes it more difficult to objectively hold business to account for its own nefarious activities. These include tender fraud, collusion, price fixing, fronting, illicit capital flows and <a href="https://panamapapers.icij.org/">tax evasion</a>. Framing the discourse as “white monopoly capital” muddies the waters. It becomes unclear whether exposing private sector crimes is merely a politically motivated assault, or an attempt to uphold the law. </p>
<p>Secondly the ongoing rhetoric will further damage the chances of economic recovery. This is because it will deter long-term domestic and international investment. It will also encourage companies to move their <a href="http://www.businesslive.co.za/bd/economy/2017-04-28-more-investment-in-sa-likely-to-be-put-on-ice/">capital elsewhere</a> and use complex tax avoidance mechanisms.</p>
<p>Thirdly trumpeting vacuous slogans is also unlikely to raise the prospects of credible policies that will deal with the country’s structural challenges.</p>
<h2>Populist slogans don’t fix structural challenges</h2>
<p>Over the last two decades South Africa has failed to modernise its labour and education systems. This has meant limited success in rolling back <a href="http://www.politicsweb.co.za/documents/south-africas-troubles-a-diagnosis">poverty, inequality and unemployment</a>. As a result the country has one of the highest unemployment rates and <a href="http://www.worldbank.org/en/country/southafrica/overview">gini coefficients</a> in the world.</p>
<p>The structural problems in the education system have resulted in <a href="http://www.universityworldnews.com/article.php?story=20100114190733824">poorly prepared</a> senior school and <a href="http://www.capetalk.co.za/articles/240257/black-students-are-not-adequately-prepared-for-university-life-edu-professor">university graduates</a>. This is despite the number of children attending school increasing exponentially since compulsory education was introduced in 1994. </p>
<p>Consequently, the country is poorly positioned to take advantage of the <a href="https://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/">“fourth industrial revolution”</a>. This is broadly understood as a range of new technologies that fuse the physical, digital and biological worlds. </p>
<p>Making things worse is the failure to adopt industrial policies to diversify the country’s export mix away from commodities to more <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0351.2008.00337.x/full">sophisticated</a> beneficiation and manufacturing activities. Commodities such as gold, platinum and coal, thus continue to comprise a significant portion of the country’s <a href="http://atlas.media.mit.edu/en/profile/country/zaf/">export earnings</a>. </p>
<p>Although the services-based sectors have given rise to an <a href="http://www.news24.com/MyNews24/Rise-of-the-black-middle-class-20140604">emerging middle class</a>, this new wealth is largely <a href="http://www.destinyconnect.com/2015/05/22/sas-black-diamonds-riddled-with-debt/">debt-fueled and consumption driven</a>. This limits savings, capital accumulation and <a href="https://www.businesslive.co.za/bd/opinion/2017-01-27-household-wealth-drop-trips-up-economy/">class mobility</a> for most of the population. </p>
<h2>What’s at stake</h2>
<p>In mid-2017 the rating agency Moody’s will review South Africa’s <a href="http://www.enca.com/money/moodys-pushes-back-sa-credit-rating-decision">sovereign credit rating</a>. This comes after two recent downgrades by global credit rating agencies <a href="https://www.businesslive.co.za/bd/economy/2017-04-07-fitch-downgrades-south-africa/">S&P and Fitch</a>.</p>
<p>A great deal hangs on Moody’s decision. If it downgrades the government’s rand-based bond credit rating two notches to junk status, the country will be expelled from the <a href="https://www.businesslive.co.za/bd/economy/2017-04-10-sa--risks--losing-r150bn-with-more-downgrades/">World Government Bond Index</a>. This will compromise its credibility as an investment destination. It will stimulate significant capital flight as international bond funds with investment-grade mandates are forced to sell off South African sub-investment grade bonds. </p>
<p>The rand will then depreciate and the trade deficit will widen. The central bank could then be forced to hike interest rates to curb inflationary pressures. Unemployment will rise and the government’s fiscal slack will be further depleted. </p>
<p>A downgrade of the rand denominated bonds would spark economic instability, and potentially significantly weaken the country’s private sector. The country’s politically connected elite could respond to this crisis by seeking to consolidate political power. This could be achieved using “radical economic transformation” to decimate the vestiges of “white monopoly capital.”</p>
<p>In the wake of the recent downgrades, some politicians have been peddling an <a href="http://www.news24.com/Columnists/MaxduPreez/sa-is-making-a-historic-mistake-20170425">illusion</a> that the country’s current woes are simply <a href="http://www.news24.com/SouthAfrica/News/we-want-the-rand-to-fall-so-that-when-it-rises-we-will-control-the-economy-maine-20161222">“short-term pain</a> for long-term gain” for the majority of South Africans. </p>
<p>But the experiences of numerous countries have shown that there is no gain from going down the populist economic path – <a href="http://whynationsfail.com/summary/">only state failure</a>.</p>
<p>There are tentative signs that this risk is beginning to take hold among some ANC leaders. Even Zuma’s newly appointed Finance Minister began watering down the term “radical economic transformation” at the recent World Economic Forum Africa gathering. Instead he opted to use the phrase <a href="http://citizen.co.za/news/news-national/1503159/gigaba-tells-investors-not-worry-radical-economic-growth-talk/">“inclusive growth”</a>.</p>
<p>What needs to be made clear is that the debate around “white monopoly capital” and “radical economic transformation” is about much more than statistics and definitions. It is about the ownership and control of both public and private capital by a politically connected elite. Thus it comes with the potential risk of turning South Africa’s entire economy into a centrally controlled patronage network.</p><img src="https://counter.theconversation.com/content/77194/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town. </span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The populism politics adopted by South Africa’s ruling party, African National Congress, mask a strategy to deflect attention from the party’s policy failures and to hide its many scandals.Sean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownMisheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/757172017-04-06T09:20:29Z2017-04-06T09:20:29ZDowngrade: a wake-up call for South Africa to revisit key economic policies<figure><img src="https://images.theconversation.com/files/164251/original/image-20170406-6397-i29ju2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's new Finance Minister Malusi Gigaba.</span> <span class="attribution"><span class="source">Reuters/James Oatway</span></span></figcaption></figure><p>South Africa is digesting the news of Standard & Poor’s (S&Ps) <a href="http://www.fin24.com/Economy/full-statement-sp-cuts-sa-to-junk-status-fears-political-risks-20170403">downgrade</a> of its state debt held in foreign currency following President Jacob Zuma’s March cabinet <a href="https://theconversation.com/stakes-for-south-africas-democracy-are-high-as-zuma-plunges-the-knife-75550">reshuffle</a>. As the country deals with that blow, two other credit rating agencies (Fitch and Moody’s) will soon hold forth. </p>
<p>Even if these agencies’ biases and competence <a href="http://debt-issues.blog.rosalux.de/files/2012/11/Bond-Berlin-paper-on-debt-and-uneven-development-in-contemporary-South-Africa.pdf">should be questioned</a>, it’s likely that further downgrades will lead to a meltdown of the currency.</p>
<p>This scenario would mirror the events of 1985 when then President PW Botha delivered his <a href="https://theconversation.com/south-africa-is-on-a-cliff-edge-just-as-it-was-in-1985-53094">crazed Rubicon Speech which caused</a> a $13 billion default. The foreign debt/GDP ratio hit 40%. Today it is nearly 50%. Botha was compelled to impose exchange controls. </p>
<p>As Zuma goes for broke, the main task ahead for South Africans is to renew the ideological debate over how to protect the currency and kick-start the economy – sensibly and without corruption.</p>
<p>The National Treasury and South African Reserve Bank could initiate a long overdue era of redistribution, racial justice and radical economic transformation. They would need to impose tighter exchange controls to protect the currency, lower interest rates, harness the power of state owned enterprises but without the recent corruption, and increase strategic state spending. </p>
<p>The new Finance Minister Malusi Gigaba <a href="http://ewn.co.za/2017/04/01/finance-minister-malusi-gigaba-radical-transformation">promised</a> to pursue at least one of these at his first press conference after being sworn in. He said that one of his key focus areas would be <a href="https://www.ft.com/content/b7f0766c-16cf-11e7-a53d-df09f373be87">to accelerate “radical economic transformation”</a>. Cynics might point out that he made his comments on April Fool’s Day. </p>
<h2>State owned enterprises</h2>
<p>Similar <a href="http://mg.co.za/article/2014-04-23-soapbox-radical-economic-change-should-be-the-focus-of-this-election">false promises</a> of transformative infrastructure left the country <a href="https://mg.co.za/?article/2014-05-02-soapbox-gigabas-pleasing-infrastructure-promises-soon-to-be-broken-in-durban">disappointed</a> during Gigaba’s role as Minister of State Enterprises between 2010 and 2014. Instead, he bought into the mania for mega-projects which either didn’t work or rewarded carbon-intensive multinational corporations: </p>
<ul>
<li><p>Eskom’s <a href="http://www.dailymaverick.co.za/article/2015-09-29-op-ed-chancellor-house-the-focus-of-hitachis-19m-sec-settlement/#.WAvyusmMSvk">corrupt</a> and <a href="https://www.dailymaverick.co.za/article/2017-04-02-op-ed-eskoms-electricity-surplus-and-self-inflicted-death-spiral/#.WOG3gmclGQw">unnecessary</a> <a href="http://www.fin24.com/Economy/Eskom/water-scarcity-and-pivot-away-from-carbon-riles-medupi-kusile-20160114">Medupi</a> and <a href="https://www.businesslive.co.za/bd/opinion/2016-12-14-cancelling-part-of-kusile-could-save-millions-and-advance-renewables/">Kusile</a> coal-fired power plants. </p></li>
<li><p>Its <a href="http://www.biznews.com/sa-investing/2016/09/23/eskom-unveils-plan-to-pay-for-nuclear-power-plants/">desired</a> R1 trillion in nuclear plants apparently <a href="https://www.businesslive.co.za/rdm/politics/2017-01-18-zuma-the-guptas-and-the-russians--the-inside-story/">pre-contracted</a> (liability-free) from <a href="http://www.news24.com/SouthAfrica/News/russian-nuclear-deal-places-massive-liability-on-south-africans-20170225?">Moscow’s Rosatom</a>. </p></li>
<li><p>Transnet’s climate-frying facilitation of an R800 billion <a href="http://www.mqa.org.za/sites/default/files/Sector%20Skills%20Plan%202015%20-%202016.pdf">plan</a> to export 18 billion tons of coal from Limpopo, Mpumalanga and KwaZulu-Natal and a <a href="https://www.pressreader.com/south-africa/the-mercury/20161114/281754153900981">R250 billion</a> Durban port-petrochemical expansion. </p></li>
<li><p>PetroSA’s R80 billion <a href="http://mg.co.za/article/2011-03-11-mthombo-a-white-elephant-in-the-making">Mthombo refinery</a>.</p></li>
<li><p>World Cup stadiums <a href="http://www.bbc.com/sport/0/football/14348193">now recognised</a> as white elephants after <a href="http://www.reuters.com/article/soccer-leaders-safrica-idUKLDE6951AC20101006">initial assurance</a> they would not be. Thankfully one of Pravin Gordhan’s last acts as Finance Minister was to halt <a href="https://www.dailymaverick.co.za/opinionista/2016-12-05-durban-should-quit-as-commonwealth-games-host-city/">the ridiculous</a> R6.4 billion Durban 2022 Commonwealth Games. </p></li>
</ul>
<p>Sports events aside, these mega-projects are mainly the foibles of state-owned enterprises which S&P singled out on Monday as its second reason – after political hijinks – for the rating <a href="http://www.fin24.com/Economy/full-statement-sp-cuts-sa-to-junk-status-fears-political-risks-20170403">downgrade</a>. </p>
<p>Of <a href="https://theconversation.com/public-enterprises-played-a-big-part-in-south-africas-credit-ratings-downgrade-75745">particular concern</a> are government guarantees used to underwrite public enterprise liabilities which the rating agency forecasts will reach R500bn by 2020. </p>
<p>If instead of mega-projects, Eskom and Transnet built renewable energy and cheap commuter rail transport, for example, radical economic transformation would make South Africa much more sustainable. But that would require a 180-degree turnaround.</p>
<h2>Why South Africa needs exchange controls</h2>
<p>Since Zuma won’t reverse either the cabinet reshuffle or his patronage tendencies, tighter exchange controls are the only way to prevent a debilitating raid on the currency. </p>
<p>Once two rating agencies downgrade South Africa’s local currency debt, the country will be dropped from the Citibank’s World Government Bond Index. As Sygnia’s Magda Wierzycka <a href="https://www.businesslive.co.za/bd/opinion/2017-04-06-will-downgrades-intensify-or-reverse-treasurys-neo-liberal-ideology/">warns</a>:</p>
<blockquote>
<p>If our rand-denominated debt is rated as junk by S&P and Moody’s, South Africa will be dropped from the index. Immediately on that happening, approximately $10-billion, or R137-billion, will flow out of the country.</p>
</blockquote>
<p>That could tempt the South African Reserve Bank to rapidly raise interest rates to protect the rand and restore financial inflows. Higher rates give investors a return needed to offset risk. It has taken drastic action like this before. In 1998 Governor Chris Stals <a href="https://books.google.com/books?isbn=1842773933">raised rates</a> by 7 percentage points within two weeks, as the currency crashed from R7/$ to R10/$. </p>
<p>Instead, a different strategy is needed to deter financial predators and gain the space to lower interest rates: <a href="https://theconversation.com/south-africa-needs-tougher-exchange-controls-before-junk-status-hits-68085">tighter exchange controls</a>. </p>
<p>South Africa already has some in place. Pension funds and other institutional investors must retain 75% of their assets in the domestic market. By <a href="http://www.biznews.com/sa-investing/2016/12/07/exchange-controls-junk/">all accounts</a> this saved South Africa during the last financial meltdown in 2008. </p>
<p>But more controls are needed. Foreign financiers are a fickle group. French bank Societe Generale, for example, recently <a href="http://www.fin24.com/Economy/political-risk-bring-it-on-say-investors-in-sa-debt-20170403#cxrecs_s">increased</a> its rand assets in search of high interest rates. Currently only two countries <a href="http://www.economist.com/indicators">are paying</a> more on 10-year government bonds than South Africa (8.9%) – Venezuela and Brazil.</p>
<p>With rates that high, financial markets are bound to be buoyed by speculative “hot money.” South Africa has the power to stop this from happening. It could, for example, penalise corporations and wealthy residents for taking money out. A similar arrangement, known as the “fin rand” existed between 1985 and 1995.</p>
<h2>Well-directed state spending</h2>
<p>Capitalism’s greatest-ever economist, John Maynard Keynes, <a href="https://www.mtholyoke.edu/acad/intrel/interwar/keynes.htm">insisted</a> that under circumstances of global financial volatility and economic stagnation, not only should exchange controls be imposed. Localised production and greater state spending would be necessary to overcome the private sector’s unwillingness to invest.</p>
<p>The danger everyone recognises, though, is that if Zuma’s new team did abandon fiscal austerity, it would not use additional resources wisely to support economy, society and environment: higher social grants, #FeesMustFall on university tuition, basic-needs infrastructure, reduction of women’s burdens, or a climate justice transition, as a few examples. </p>
<p>In any case, Gigaba has <a href="https://www.bloomberg.com/news/articles/2017-03-31/south-africa-s-gigaba-says-he-will-work-within-fiscal-framework">committed</a> to continuing the austerity drive. He aims to lower the 2019 budget deficit to just 2.6% of GDP: </p>
<blockquote>
<p>I will work within the fiscal framework as agreed by government and parliament. There will not be any reckless decisions.</p>
</blockquote>
<p>The problem for South Africa is that a mild-austerity fiscal framework was tried by Gordhan and failed to restructure the economy or boost growth. </p>
<p>Most neoliberals supporting austerity are expressing schadenfreude – happiness at someone else’s misfortune – because the downgrade is a good stick with which to whip Zuma. They aren’t particularly concerned about economic transformation, poverty or racial inequality.</p>
<p>Nor is Zuma apparently concerned about the economic risks the downgrade has just imposed on all South Africans - his first priority is political survival. </p>
<p>In the days ahead, an ideological debate is desperately needed to sort out society’s options. But the debate would need to transcend the current quagmire caused by both Zuma’s corruption and National Treasury’s capture by the ratings agencies.</p><img src="https://counter.theconversation.com/content/75717/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrick Bond does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An ideological debate is desperately needed to sort out options South Africa could pursue to find a way out of its economic morass.Patrick Bond, Professor of Political Economy, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/757452017-04-05T08:34:21Z2017-04-05T08:34:21ZPublic enterprises played a big part in South Africa’s credit ratings downgrade<figure><img src="https://images.theconversation.com/files/164044/original/image-20170405-11362-hdwogb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>With the broader implications of last week’s cabinet reshuffle in South Africa still being digested, capital markets have been quick to react. It took only a few days for S&P to formally report on its rating action in which it <a href="http://www.fin24.com/Economy/breaking-sp-downgrades-sa-to-junk-status-20170403">downgraded</a> South Africa’s foreign currency government debt to sub-investment grade status. </p>
<p>S&P cited as its concerns changes in the country’s executive leadership. It believes this has put policy continuity at risk which in turn increases the likelihood that economic growth and fiscal outcomes could suffer.</p>
<p>Not to be lost in this chain of events is the significant role played by South Africa’s state owned enterprises. </p>
<p>S&P highlighted this in its note on the downgrade. Its main worry is that plans to improve the underlying financial positions of parastatals such as Eskom, South Africa’s massive power utility, may not be fully implemented. This is critical, as S&P has forecast government guarantees used to underwrite public enterprise liabilities reaching R500bn by 2020. That’s roughly 10% of South Africa’s current GDP. </p>
<p>No doubt S&P had in mind the continued investment in expensive state sponsored power generation programmes. These are contracted to Eskom for off-take, but must be underwritten by government guarantees to secure financing. Even more troubling is the fact that existing low-cost facilities are to be retired ahead of schedule. This is to make room for the new found excess in power generating capacity. </p>
<h2>Regulations are being ignored</h2>
<p>It’s important to keep in mind that the overhang of government guarantees by itself wouldn’t necessarily have led to a ratings downgrade. With the right governance structures and regulatory frameworks in place, state owned enterprises could be transformed from a liability to an asset. They could then support relatively high levels of debt for investments done on a prudent and value adding basis. </p>
<p>But there’s been little evidence of positive movement in this area. And it should come as no surprise that, at the moment, S&P sees state owned enterprises as risks — not enablers. </p>
<p>As a glaring example, take the National Energy Regulator South Africa decision on tariffs for Eskom. The North Gauteng High Court found that the regulator had deviated from its own set of regulatory rules in setting the tariffs. The regulator has since been granted leave to appeal that decision, arguing that the deviation had <a href="http://www.ee.co.za/wp-content/uploads/2016/10/NERSA-application-to-appeal-6-Sep-2016-1.pdf">little practical effect</a>. In effect it argued that the end justified the means. </p>
<p>While the argument put forward by the regulator may have some factual basis, the real issue is that it has shown little real concern over the general lack of procedural fairness and transparency applied to its decision making process. It will be interesting to see how the Supreme Court of Appeal views the matter on review.</p>
<p>The <a href="https://theconversation.com/south-africas-airports-company-faces-a-hard-landing-why-this-is-bad-news-for-the-country-72115">decision over airports tariffs</a> is another disturbing example of poor regulatory processes. In December last year Airports Company of South Africa, which regulates the sector, called for a 35.5% decrease in airport charges. Despite concerns previously raised by credit rating agencies over the lack of transparency in setting airports tariffs, the regulator is yet to publish the basis of its decision, or any of the underlying analysis that would have informed its tariff order. </p>
<h2>Perception or reality?</h2>
<p>S&P’s downgrade decision doesn’t represent a consensus view of the global rating agencies. Importantly, Moody’s has so far stopped short of issuing a downgrade. Instead, it’s opted to place South Africa on review to determine if recent events signal a fundamental weakening of the country’s institutional, economic and fiscal strength. </p>
<p>The newly appointed Minister of Finance Malusi Gigaba was <a href="http://www.sabc.co.za/news/a/ab2e1d8040a8b726ad60fdd9ce9b621f/Gigabaundefinedurgesundefinedcountryundefinedtoundefinedreigniteundefinedeconomicundefinedgrowth-20170404">quick to respond</a> to these concerns. Importantly he’s recognised the value of putting forward the case for South Africa cogently and systematically. </p>
<p>He also highlighted the fact that National Treasury will be focused on reversing the triple challenges of poverty, unemployment, and inequality. </p>
<p>Rating agencies would no doubt support these aims, and recognise the fundamental importance of achieving them. </p>
<p>What’s been lost in stating the case for South Africa is a tangible plan for strengthening governance and regulation of its state owned enterprises. With the public sector playing a huge role in the nation’s overall economy, well designed regulatory frameworks need to be articulated by government, implemented by its officials, and embraced by those entities to which they apply. This isn’t overly difficult or costly - it only takes the policy appetite to do so.</p><img src="https://counter.theconversation.com/content/75745/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Stephen Labson has previously acted as a regulatory adviser to South African state owned enterprises. He has not received any payment or other benefits for writing this article. </span></em></p>What has been lost in stating the case for South Africa’s credit rating is a tangible plan for strengthening governance and regulation of its state owned enterprises.Stephen Labson, Director, Trans African Energy, and Senior Research Fellow, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/757062017-04-04T11:36:35Z2017-04-04T11:36:35ZAfter the downgrade: South Africa should copy Brazil and impeach its president<figure><img src="https://images.theconversation.com/files/163832/original/image-20170404-5732-dzao8l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's President Jacob Zuma looks on as his new cabinet members are sworn in.</span> <span class="attribution"><span class="source">Reuters/Siphiwe Sibeko</span></span></figcaption></figure><p>The news that South Africa’s sovereign rating has been <a href="http://www.fin24.com/Economy/breaking-sp-downgrades-sa-to-junk-status-20170403">downgraded</a> caught many by surprise. But it was long coming. The main reason for the rating agency’s decision is clearly concerns about political leadership in the country. Moody’s, which is expected to follow suit, has <a href="https://www.moodys.com/research/Moodys-places-South-Africas-Baa2-ratings-on-review-for-downgrade--PR_364595">said</a> as much, stating its decision to put the country on a negative outlook down to “the abrupt change in leadership of key government institutions”.</p>
<p>The downgrade by S&P comes on the back of a highly charged political environment in the ruling African National Congress. This culminated in the <a href="http://www.news24.com/SouthAfrica/News/why-zuma-reshuffled-his-cabinet-20170402-2">sacking</a> of the finance minister Pravin Gordhan and his <a href="http://www.ujuh.co.za/zumas-cabinet-reshuffle-points-to-the-rise-of-malusi-gigaba/">replacement</a> with Malusi Gigaba. While the <a href="https://theconversation.com/firing-of-south-africas-finance-minister-puts-the-public-purse-in-zumas-hands-75525">cabinet reshuffle</a> is the proximate cause of the downgrade, South Africa’s political and institutional malaise goes deeper.</p>
<p>So how does the country surf through these turbulent waters? </p>
<p>One hopes that the credit downgrade could help to focus the mind of the country’s political leadership to the task at hand, and that this will inject much-needed urgency for political change and economic reforms. The S&P assessment <a href="https://www.standardandpoors.com/en_US/web/guest/ratings/search/-/search/searchType/E/searchTerm/south%20africa">casts a ray of hope</a>:</p>
<blockquote>
<p>We could revise the outlook to stable if we see political risk reduced and economic growth or fiscal outcomes strengthen compared to our baseline projections. </p>
</blockquote>
<p>Piecemeal efforts towards change will not be enough. Bold leadership is required. But it’s inconceivable that the kind of action required can happen under President Jacob Zuma’s leadership. </p>
<p>The real chance to turn the country around is to do precisely what the Brazilians did last year – to <a href="http://www.bbc.com/news/world-latin-america-37237513">impeach</a> the president while building momentum in civil society to achieve political renewal as the basis for sustained economic recovery. </p>
<h2>South Africa failed to heed warning signs</h2>
<p>For nearly a decade now, international financial institutions and other international organisations have warned South Africa about a number of dangers. These include policy uncertainty, the consequences of low growth for social stability, and the need to attend urgently to industrial relations, especially in the mining sector. </p>
<p>Dire warnings are contained in a number of reports. These include the International Monetary Fund’s latest annual <a href="https://www.imf.org/en/News/Articles/2016/07/11/13/25/PR16322-South-Africa-IMF-Executive-Board-Concludes-2016-Article-IV-Consultation">assessment</a> of South Africa’s macro-economic conditions, the Organisation of Economic Cooperation and Development (OECD) <a href="http://www.oecd.org/eco/surveys/South-Africa-OECD-economic-survey-overview.pdf">periodic survey</a> and the World Bank Economic <a href="http://www.worldbank.org/en/country/southafrica/publication/south-africa-economic-update-promoting-faster-growth-poverty-alleviation-through-competition">Update</a>. </p>
<p>South Africa experienced downgrades in <a href="https://www.moodys.com/research/Moodys-downgrades-South-Africas-government-bond-rating-to-Baa1-outlook--PR_256159">2012</a>, <a href="http://www.treasury.gov.za/comm_media/press/2013/2013011101.pdf">2013</a> and <a href="http://www.stanlib.com/EconomicFocus/Pages/FitchdecidedtodowngradeSouthAfricascreditratingtoBBB.aspx">2015</a>. These should have been read as a harbinger of worse things to come. Government had ample time to draw appropriate lessons from these warnings, but chose to stick its head in the sand in the hope that problems would varnish. Meanwhile, the ruling party elevated factional battles above interest of the country. </p>
<p>South Africa could have also drawn lessons from Brazil which was downgraded by S&P and Moody’s to <a href="http://www.reuters.com/article/us-brazil-ratings-s-p-idUSKCN0RA06120150910">sub-investment grade status</a> in 2015 . This was in the wake of political unrest over a massive <a href="http://www.bbc.com/news/world-latin-america-35810578">corruption scandal </a>at the oil giant Petrobas, declining business confidence, growing policy uncertainty and President Dilma Rousseff’s weak leadership. </p>
<p>The downgrade further worsened Brazil’s growth outlook, with capital fleeing the country. Less than a year later after the downgrade, the Senate had thrown Rousseff <a href="https://www.theguardian.com/world/2016/aug/31/dilma-rousseff-impeached-president-brazilian-senate-michel-temer">out of office</a>.</p>
<h2>What’s to follow the downgrade</h2>
<p>In a sense, credit downgrades shouldn’t come as a surprise. They are like a medical report showing defects in the vital organs in the body while the patient is still alive and can do something about them, albeit requiring uncomfortable surgical procedure and a strong dose of medication. </p>
<p>In evaluating South Africa, S&P took into account the effectiveness of policymaking and stability of political institutions to respond effectively to socio-economic challenges, and found these wanting. The S&P <a href="http://ewn.co.za/2017/04/03/read-the-full-standard-and-poors-statement-south-africa-credit-rating-junk-status">statement</a> specifically singled out the risk of cabinet reshuffle on fiscal and growth outcomes, the possibility of increase in the contingent liabilities of the state – in particular the likelihood of state-owned enterprises such as <a href="https://theconversation.com/why-south-africas-power-utility-isnt-in-great-financial-shape-68441">Eskom</a>, the power utility, to draw down on government guarantees – and increased political risks in general in the current year. </p>
<p>The consequences of this downgrade are not difficult to discern: they will trigger a disposal by pension funds and other institutional investors of South African debt, since these funds are not allowed to hold sub-investment grade (or speculative) bonds. Sub-investment grade status will increase South Africa’s borrowing costs from global markets. </p>
<p>Interest rates are likely to go up, with debt-laden consumers bearing the brunt. Capital will flee in search of safer havens for healthy returns. </p>
<p>There are political implications too. Government spending will be constrained, including for welfare programmes and delivery of various public services, raising prospects of waves of political unrest in the run up to 2019 elections. </p>
<p>And there’s likely to be more pressure on the government to increase public servants’ salaries. </p>
<p>Further accentuating the strain on the economy is the fact that growth is likely to remain in the doldrums; with the employment outlook remaining bleak for the foreseeable future. Export growth is projected to remain flat during 2017 and 2020. As S&P notes, economic growth is unlikely to come from business investment, since business will be withholding capital in the face of heightened political risk. </p>
<h2>Solutions</h2>
<p>Bold political and economic reforms are urgently needed. Tough times such as the ones South Africa is headed can also be crucibles for transformative leaders who are willing to break rank from the small-mindedness of their parties, and chart a different course that delivers real change. </p>
<p>Zuma has already squandered his credibility, and showed himself as out of kilter with the realities of the economy. The major task of pushing for structural reforms in the economy and to restore stability lies with the Minister of Finance, who ideally should have relative autonomy from the president and able to corral his cabinet colleagues to behave responsibly. Disappointingly, Malusi Gigaba, the new minister, started on a bad footing, peddling <a href="http://www.treasury.gov.za/comm_media/speeches/2017/2017040101%20Speech%20by%20Minister%20of%20Finance%20Malusi%20Gigaba%20on%20his%20new%20Portfolio.pdf">rhetoric</a> and taking ambiguous and contradictory positions in his early days in office. </p>
<p>So what would a package of reforms look like? Government needs to send a clear and strong message about the direction of economic policy. This must be followed by a bold set of actions that could immediately restore confidence and gain the support of the private sector. There’s also a need to restructure state-owned enterprises, improve efficiencies and restore good corporate governance.</p><img src="https://counter.theconversation.com/content/75706/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mzukisi Qobo does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The best chance South Africa has of recovering from sub-investment grade credit rating status is to have leaders who are prepared to break rank with the small-mindedness of the ruling party.Mzukisi Qobo, Deputy Chair: SA Research Chair on African Diplomacy and Foreign Policy, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/707762017-01-11T02:07:51Z2017-01-11T02:07:51ZWill the ‘Trump rally’ continue through 2017?<p>So far, investors appear to be giving Donald Trump their vote of confidence. </p>
<p>After his election as the 45th president of the United States, <a href="http://data.cnbc.com/quotes/.DXY/tab/1">the U.S. Dollar Index</a> rallied around 4 percent through the end of the year, while the Dow Jones Industrial Average approached 20,000 for the first time in its history and the Standard & Poor’s 500 was up just under 5 percent. </p>
<p>So now that investors have finished their usual year-end review of where to put their money, one question is on everyone’s mind: Will the so-called <a href="http://money.cnn.com/2017/01/03/investing/stocks-trump-rally-2017/">Trump rally</a> continue in 2017?</p>
<p>In early November, <a href="https://theconversation.com/what-we-can-learn-from-markets-reaction-to-a-president-trump-68116">I wrote an article</a> based on my study showing that how stocks reacted in the first few days after a president’s victory would likely determine their performance for the rest of 2016 – which turned out to be true in Trump’s case. </p>
<p>In a similar vein, a separate <a href="https://www.researchgate.net/publication/46529456_The_'other'_January_effect_and_the_presidential_election_cycle">study I published</a> in 2009 demonstrated that how a stock market performs in the January a president takes office could portend its fortunes for the remainder of the year. </p>
<p>So will that also turn out to be true for Trump?</p>
<h2>‘As January goes’</h2>
<p>In that study, which I called “The ‘Other’ January Effect and the Presidential Election Cycle,” I combined two lines of research. </p>
<p>First, going at least as far back as the 1940s, the so-called January effect is a well-known bias in individual stock behavior in which stocks that lose value at the end of the year tend to reverse those losses in January.</p>
<p>The other January effect, which I use in my study, refers to <a href="http://www.sciencedirect.com/science/article/pii/S0304405X06000948">evidence published in 2005</a> suggesting that January’s returns hold predictive power for the remainder of the year. </p>
<p>More specifically, this effect claims that when stocks go up in January, they tend to continue to climb for the rest of the year, and vice versa – regardless of the impact of other usual drivers of stock market returns. On Wall Street, this effect is often dubbed: “As January goes, so goes the year.” For the rest of the article, for simplicity’s sake, I’ll call this the January effect.</p>
<p>Second, I combined this January effect with the four-year presidential election cycle (PEC) to see how it influenced January’s predictive abilities. <a href="http://www.cfapubs.org/doi/pdf/10.2469/faj.v36.n5.49">The PEC</a> refers to a cycle in which U.S. stock market returns during the last two years of a president’s term tend to be significantly higher than gains during the first two years. This cycle is especially true for the third year of a president’s term, which has almost always been positive.</p>
<p>For my study, I wanted to see if the timing of the presidential cycle (first year, second year, etc.) affected January’s predictive abilities. I studied monthly returns (without dividends) of the S&P 500 over the 67-year period from 1940 through 2006. </p>
<h2>January’s predictive power</h2>
<p>Overall, my results were consistent with the <a href="http://www.sciencedirect.com/science/article/pii/S0304405X06000948">paper noted above</a> demonstrating that positive returns in January typically portended gains during the other 11 months of the year, as well as the opposite. </p>
<p>They further showed, however, that January’s predictive power is most convincing during the president’s first and fourth years in office. Since, at the moment, we care most about the first year of a president’s term, I’ll focus on those results.</p>
<p>Over my sample period of basically 17 election cycles, I found that during the president’s first year in office, average returns for the 11 months following a positive January were 12.29 percent, while a negative January led to average losses of 7.91 percent over the remainder of the year. That’s a difference of more than 20 percentage points – or over US$200,000 on a $1 million investment. </p>
<p>Furthermore, I found that a positive or negative January predicted returns for the remainder of the year almost 90 percent of the time, suggesting a very strong correlation. </p>
<h2>Recent results have been split</h2>
<p>Since <a href="https://www.researchgate.net/publication/46529456_The_'other'_January_effect_and_the_presidential_election_cycle">my study</a> was published, there have been two more elections, one of which ran contrary to the January effect, while the other confirmed it.</p>
<p>After President Barack Obama won the 2008 election, the S&P 500 lost 8.6 percent during his inaugural month of January. But the market rallied for the remainder of the year by about 35 percent.</p>
<p>Conversely, after his reelection in 2012, stocks returned around 5 percent in January 2013 and, consistent with the other January effect, the market climbed another 23 percent over the remainder of the year.</p>
<h2>What’s behind this?</h2>
<p>So what’s driving the effect? </p>
<p>Exactly what drives this effect is a topic of debate. For example, I tested whether it may be driven by monetary policy, which did not seem to be the case.</p>
<p>A common argument for the PEC is that it reflects investor views of fiscal policy, which is why returns during the second two years of the cycle tend to be higher than the first two. Yet my most significant results were for the first and fourth years. </p>
<p>Nonetheless, while I did not specifically test for fiscal policy influences, it seems valid since my results showed that January’s effect appears to be the most reliable during the president’s incoming year in office. The effect wasn’t nearly as pronounced during the other three years.</p>
<p>So far, that seems to be the case at the moment as the “Trump rally” appears to be a response to anticipated fiscal policy. </p>
<h2>What to expect in 2017</h2>
<p>Of course, there is never complete certainty in the markets, especially with an unavoidably small sample size like 17 election cycles. Still, the results of my study provide compelling evidence that, particularly in the president’s first year in office, January’s returns appear to capture information that is valuable for anticipating returns for the remainder of the year. </p>
<p>As of Jan. 10, the S&P 500 was up about 1.5 percent for the year and near its record high of 2,282, while the Dow continued to flirt with that magical 20,000 number.</p>
<p>While January’s full-month returns are not yet known, history strongly suggests that investors would be wise to closely monitor the S&P 500. If January 2017 remains positive for U.S. stocks, returns for the remainder of 2017 may very likely also be positive. The opposite can also be expected. </p>
<p>So for investors looking ahead in 2017, as January goes, perhaps so will the remainder of 2017.</p><img src="https://counter.theconversation.com/content/70776/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ray Sturm does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A common Wall Street adage claims: ‘As January goes, so goes the year.’ What does that mean for investors as stocks look set to end President-elect Trump’s first month in office higher?Ray Sturm, Associate Lecturer of Finance, University of Central FloridaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/693612016-11-24T11:27:14Z2016-11-24T11:27:14ZWhy credit ratings matter and why they can’t be ignored<figure><img src="https://images.theconversation.com/files/147339/original/image-20161124-15330-cbwrbg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa faces a possible downgrade by credit rating agencies.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>This article was first published in 2016 as South Africa faced a possible downgrade by rating agencies. The Conversation Africa’s Charles Leonard asked Mampho Modise to explain the significance of a rating agency downgrade.</em></p>
<p><strong>What do the agencies look at in the process of reviewing a country?</strong></p>
<p>In their rating <a href="http://faculty.nps.edu/relooney/3040_2.pdf">methodologies</a>, rating agencies have developed rating criteria for assessing the performance of key macroeconomic and socioeconomic indicators. By assessing the indicators, the rating agencies are able to determine the borrower’s ability and willingness to honour debt obligations. </p>
<p>Rating criteria focus on the following components and indicators: </p>
<ul>
<li><p><strong>Economic structure and performance:</strong> Real GDP, per capita income, headline inflation rate, gross investment as a percentage of GDP and gross domestic savings as a percentage of GDP.</p></li>
<li><p><strong>Government finances:</strong> Government revenue to GDP, government expenditure to GDP, government debt to GDP, debt interest payment to revenue and the budget balance as a percentage of GDP.</p></li>
<li><p><strong>External payments and debt:</strong> Current account balance as a percentage of GDP, the ratio of external debt to GDP and level of official reserves.</p></li>
<li><p><strong>Susceptibility to event:</strong> Political risk, socioeconomic risk, external vulnerability risk and institutional independence. </p></li>
</ul>
<p>When reviewing the sovereign ratings, rating agencies hold discussions with various stakeholders in government, labour, civil society and the private sector. The reason the private sector is included is for the rating agencies to get an independent view on government policies and strategies.</p>
<p><strong>What do they do with their results?</strong></p>
<p>Once their reviews are concluded, the agencies will announce credit rating opinions which will reflect the borrower’s credit worthiness. That is the likelihood that the borrower will pay back a loan within the confines of the loan agreement, without defaulting. </p>
<p>A high credit rating indicates a high possibility of paying back the loan in its entirety without any issues. A poor credit rating suggests that the borrower has had trouble paying back loans in the past, and might follow the same pattern in the future.</p>
<p>The credit rating opinions are used by various stakeholders and for different reasons.</p>
<p>Firstly, investors use credit ratings as a guide to their investment decisions. Credit ratings provide an independent and objective assessment of the credit worthiness of countries and corporations. This assists investors to decide how risky it is to invest money in a certain country or corporation. </p>
<p>Secondly, for corporations and governments who want to raise money in the capital market, a favourable rating means a country will be able to obtain funds at a lower cost.</p>
<p>Lastly, governments could also use credit ratings as a measure for gauging their performance relative to peers to effect improvements. </p>
<p><strong>Which political developments in South Africa are likely to have an impact on the reviews?</strong></p>
<p>A few areas of concern have been cited.</p>
<p>The outcome of the <a href="http://ewn.co.za/2016/08/25/ANC-Divided-Confused-No-plan--Except-in-Gauteng">2016 local government elections</a> is one. The rating agencies are concerned that a drop in the voter percentage could result in fiscal loosening to draw votes back to the ruling party.</p>
<p>Another concern is the <a href="http://ewn.co.za/2016/10/11/Finance-Minister-Pravin-Gordhan-issued-with-summons-for-fraud">charges</a> instituted against the Minister of Finance Pravin Gordhan and later <a href="http://www.bbc.com/news/world-africa-37822600">withdrawn</a>. This threatened the institutional stability and integrity of the National Treasury.</p>
<p>And the political disagreements on the findings of the <a href="http://www.news24.com/SouthAfrica/News/statecapturereport-live-the-public-protector-has-been-ordered-to-publish-the-state-capture-report-20161102">state capture report</a> threatened the institutional independence of the office of the Public Protector and the courts.</p>
<p>Finally, the upcoming <a href="http://www.news24.com/SouthAfrica/News/early-anc-elective-conference-a-non-starter-20160908">elective conference</a> for the governing African National Congress (ANC) in 2017 is raising a concern on policy continuity and predictability. </p>
<p><strong>Do the agencies operate in every country around the world?</strong></p>
<p>Not necessarily. Rating agencies can operate unsolicited. But major rating agencies such as <a href="https://www.moodys.com/Pages/atc.aspx">Moody’s Investors Service</a> (Moody’s), <a href="https://www.spglobal.com/">S&P Global Ratings</a>(S&P) and <a href="https://www.fitchratings.com/site/home">Fitch Ratings</a> (Fitch) are solicited by countries to provide credit ratings. </p>
<p>Moody’s operates in 36 countries, S&P in 28, and Fitch in more than 30 countries.</p>
<p><strong>What happens to a country downgraded to junk status?</strong></p>
<p><a href="http://www.fin24.com/Economy/sa-junk-rating-seems-inevitable-economists-20161118">Junk status</a> is associated with high risk. Therefore, high borrowing costs. This is the main reason why a sovereign has to avoid being downgraded into a junk, or sub-investment grade. </p>
<p>For fund managers (who are representing the investors) a downgrade to junk status means they will have to sell the assets (bonds) they hold. Their mandates require that they only invest in investment grade assets.</p>
<p>For an ordinary person it means paying more interest, leaving little money for savings and expenditure on rent, school fees and food.</p>
<p>For governments it means allocating more to debt servicing costs (interest payment). Less money will be available for social grants, investment priorities, creating jobs and ultimately reducing the GDP growth potential of the country. More interest payment also crowds out other critical spending. Social services is an example.</p>
<p><strong>Is it possible for a government to simply ignore their ratings?</strong></p>
<p>Not really. Solicited credit ratings ensure easy access to international capital markets. Favourable credit ratings imply low borrowing costs. The South African government has solicited credit ratings from the top agencies to ensure that it can easily and cheaply access foreign funding needed to accomplish its economic development agenda. </p>
<p>South Africa therefore can’t ignore the credit ratings assigned to it, especially given that foreign investors hold more than <a href="http://www.treasury.gov.za/documents/national%20budget/2016/review/chapter%207.pdf">30% of government debt</a>.</p>
<p><strong>Which agency is taken most seriously?</strong></p>
<p>Sovereign credit rating is the most concentrated industry. There are approximately <a href="https://theconversation.com/qanda-why-credit-rating-agencies-matter-for-developing-countries-51964">70 rating agencies</a> globally. But most investors base their investment decisions on the credit ratings published by Moody’s, S&P and Fitch. These three control approximately 95% of the rating business.</p><img src="https://counter.theconversation.com/content/69361/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mampho Modise is affiliated with National Treasury</span></em></p>Credit ratings have an impact on government, as well as ordinary people. This article was first published last year as South Africa faced a possible downgrade.Mampho Modise, Post graduate researcher, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/632532016-08-09T03:58:39Z2016-08-09T03:58:39ZWhy credit rating agencies’ economic advice shouldn’t be trusted<p>The Australian government is using warnings from rating agencies like Standard & Poor’s Global Ratings (S&P), which placed Australia on a <a href="https://theconversation.com/australia-could-be-about-to-lose-its-aaa-rating-and-heres-why-62039">negative watch during the election</a>, to make the case for passing budget measures. In reality, S&P (and the other two agencies in the credit rating industry) has no moral or technical authority to make such a warning. </p>
<p>S&P warned that Canberra needed to take “forceful” fiscal action to address “material” budget deficits, which is unlikely in the near future, or face losing its AAA rating. </p>
<p>However, rating agencies shouldn’t be entrusted with this sort of power. As a matter of fact, it is not clear at all why the rating agencies, S&P included, are still in business. These agencies were instrumental in bringing about the global financial crisis, but have survived because of the lack of political will and because the ratings are required by law as a regulatory requirement. </p>
<p>The reputation of the credit rating agencies has been tarnished not only by the global financial crisis but, before that, by <a href="http://www.investopedia.com/articles/stocks/09/enron-collapse.asp">the Enron scandal</a>, the <a href="https://theconversation.com/can-greece-learn-from-the-story-of-indonesia-in-the-asian-financial-crisis-7513">Asian financial crisis</a> and the <a href="http://www.nytimes.com/2002/12/05/nyregion/recalling-new-york-at-the-brink-of-bankruptcy.html">financial collapse of New York City</a> in the mid-1970s. The agencies’ track record shows failure to detect frequent near-defaults, defaults and financial disasters, as well as failure to downgrade troubled firms until just before (or even after) the declaration of bankruptcy. In fact, <a href="http://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00311/full">the credit rating agencies follow the market</a>, so the market alerts the agencies of trouble, and not vice versa.</p>
<p>During the global financial crisis, hundreds of billions of dollars’ worth of triple-A-rated mortgage-backed securities were abruptly downgraded from triple-A to “junk” (the lowest possible rating) within two years of the issue of the original rating. <a href="https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf">About 73% (over $800 billion worth)</a>
of all mortgage-backed securities that one credit rating agency (Moody’s) had rated triple-A in 2006 were downgraded to junk status two years later. In the US, the <a href="https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf">Financial Crisis Inquiry Commission</a> puts a big chunk of the blame for the global financial crisis on the agencies, <a href="http://www.cfr.org/%20financial-crises/credit-rating-controversy/p22328.">while European Union officials blame</a> agencies for contributing to the advent of the European sovereign debt crisis.</p>
<p>The failure of the rating agencies can be attributed to negligence and incompetence. Starting with negligence, there is every indication that the credit rating agencies did not check the soundness of their ratings <a href="http://link.springer.com/article/10.1057/jbr.2015.9">because customers were willing or forced to buy it</a>. Negligence means that the rating agencies were in a position to make sound judgement but did not make the effort to do a thorough job. Given the bullishness prevailing in the run-up to the crisis, the agencies chose instead to receive big pay for a lousy job. </p>
<p>The agencies did not have the expertise to do the job the agencies were entrusted to do, particularly when it came to the evaluation of risk embedded in structured products. In his <a href="https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf">testimony to the Financial Crisis Inquiry Commission</a>, Gary Witt (formerly of Moody’s CDO unit) said that Moody’s didn’t have a good model on which to estimate correlations between mortgage-backed securities, so they “made them up”. </p>
<p>Credit rating agencies promoted inferior products knowing the quality of these products. The credit rating agencies knew that the risk was great or that the securities were not really AAA, <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1582539">yet they passed them as AAA</a>. </p>
<p>While the credit rating agencies may be perceived as “willing victims” of investment bankers and the issuers of securities, <a href="http://heinonline.org/HOL/LandingPage?handle=hein.journals/mulr33&div=5&id=&page=">there is also evidence</a> to suggest that the transparency, quality and integrity of the agencies’ other practices and processes were substantially lowered. This was in order to support the extraordinary growth of the agencies’ structured finance operations. In effect, the agencies deliberately overlooked the possibility that rating may have been unwarrantedly high. </p>
<p>For all of these reasons the rating agencies must not be taken seriously. The agencies are more stringent in rating countries than in rating private-sector firms, because they do not receive fees for rating countries, which is the “public relations” part of business. Credit rating agencies have every right to compete on a level playing field, but these agencies shouldn’t have oligopolistic power and should be forced to operate under the investor-pays model to avoid conflict of interest.</p><img src="https://counter.theconversation.com/content/63253/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Imad Moosa does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Credit rating agencies have a poor track record when it comes to evaluating risk.Imad Moosa, Professor, Finance, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/620712016-07-07T20:02:58Z2016-07-07T20:02:58ZVital Signs: goodbye AAA Australia?<figure><img src="https://images.theconversation.com/files/129701/original/image-20160707-30690-s7b3r1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia is one of a small number of countries that enjoy a AAA rating.</span> <span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data impacting global economies.</em></p>
<p><em>This week: The RBA leaves rates on hold, while consumers stand on the sidelines, and ratings agency S&P isn’t convinced of the government’s ability to reduce the budget deficit.</em></p>
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<p>Votes from the Australian federal election continue to be counted, and uncertainty remains on whether the Liberal-National Coalition will be able to form government. But that wasn’t the the only event of note this week.</p>
<p>The most predictable (non)-event was the Reserve Bank’s decision to leave the cash rate on hold at 1.75%. This was widely anticipated by markets –in no small part because previous announcements by the RBA basically said they were going to wait for next quarter’s inflation figures before deciding to move.</p>
<p>Those figures are out before August’s RBA board meeting. And if they show distressingly low inflation – or deflation, as last quarter’s did – then expect a 25 basis point cut. Bond markets are certainly expecting that.</p>
<p>Adding weight to the possibility of a rate cut, <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/8731.0">Australian building approvals</a> fell heavily in May, the ABS reported. Total approvals were down 5.2% on a seasonally-adjusted basis. This was driven by a huge fall in high-density approvals: they were down 10.3%</p>
<p>Piling on, the ABS reported <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/8501.0">weak retail sales</a> for May, with growth at 0.2%, leading the annual rate to be only 3.4%.</p>
<p>So, as we’ve consistently seen, consumers and investors are on the sidelines. With all the political and economic uncertainty, and <a href="https://theconversation.com/vital-signs-why-everyone-seems-a-bit-worse-off-60344">falling real national disposal incomes</a>, it’s no wonder.</p>
<p>But the big news was ratings agency Standard & Poor’s placing Australia on negative credit watch on Thursday.</p>
<p>Australia is one of a small number of countries that enjoy a AAA rating. That lowers borrowing costs for banks – and hence businesses and consumers.</p>
<p>S&P said, however, that there was:</p>
<blockquote>
<p>“a one-in-three chance that we could lower the rating within the next two years if we believe that parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s.”</p>
</blockquote>
<p>S&P wasn’t alone. Rival ratings agencies <a href="http://video.cnbc.com/gallery/?video=3000531307">Fitch</a>, and Moody’s Investor Service, also expressed concern about the impact of political uncertainty or the composition of the new parliament on Australia’s fiscal position.</p>
<p>Australia is currently one of 12 countries that enjoy a AAA rating. Such ratings are not the only thing that affect the ability to borrow at low rates. The United States, for instance, has a AA+ rating, but US Treasury Bonds are viewed as the safest government security globally.</p>
<p>Australia isn’t the US. We’re not about to become Greece, either.</p>
<p>The following chart shows the 2015 net-debt-to-GDP ratios for 8 of the 12 AAA-rated countries that the IMF holds data for.</p>
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<p>Australia was at 17.9% in 2015, and we are currently adding around 3% per annum to that figure. At that rate, it would take just two years for us to get to the median debt level of the other AAA countries (Canada, who have been breaking even budget wise recently). Yet even in around 10 years we would not be the most indebted in the AAA club. That’s assuming Germany does not run constant surpluses – it just balanced its budget for the first time in 40 years.</p>
<p>That suggests Australia has quite a lot of time to fix our budgetary issues. But S&P (and others) are suggesting not. Perhaps because they have a media cycle to manage themselves. Perhaps it’s because they want to nudge us in the right direction.</p>
<p>Or perhaps it’s because they think that if we go from zero net debt to 30-odd percent, despite the warnings, then our political system is broken – incapable of making hard change.</p>
<p>That’s pure speculation on my part. But if true, it’s an interesting thesis.</p>
<p>Perhaps it’s not the level of debt per se that matters, or even the trend. It’s what the level and trend tell you about gridlock and the inability to affect change.</p><img src="https://counter.theconversation.com/content/62071/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Ratings agency S&P seems unconvinced of the Australian government’s ability to reduce the budget deficit.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/616762016-06-28T03:07:01Z2016-06-28T03:07:01ZPost-Brexit, Australia’s best option is a trade pact with EU<p>Brexit already brings much <a href="https://theconversation.com/brexit-impact-will-be-worse-than-the-2008-crash-61648">economic damage to the UK</a>, and will do so to global economic growth as a whole. The UK’s coveted AAA credit rating has now been downgraded by Standard & Poor’s; uncertainty is hitting sharemarkets; and the pound sterling is at a 31-year low.</p>
<p>Impacts are not restricted to this. Australia has about 1500 UK-based companies as a “springboard” into the Single Market, using the UK due to close linguistic, institutional and historic linkages. </p>
<p>The UK has provided business access to the EU’s 500 million-plus consumers across the continent, minimising red tape, offering harmonised standards, product testing, and unique conditions across a single bloc of 28 countries for various market stages and its participation in the global value chains. </p>
<p>The EU is the most advanced form of trade-liberalising economic integration and the fact the UK has failed at this means its capacity to lead the world or any part of it in the field of trade liberalisation is now doubtful. </p>
<p>Some Australian companies have already actioned their transition plans and begun de-merging from British counterparts. With the rest of the world, Australians will be keenly watching events at the European Council Summit, where outgoing <a href="http://www.bbc.com/news/uk-politics-eu-referendum-36647006">British prime minister David Cameron is explaining</a> the outcome of the referendum to his European counterparts.</p>
<p>It is still in Cameron’s hands (and power) to <a href="https://theconversation.com/what-is-article-50-the-law-that-governs-exiting-the-eu-and-how-does-it-work-60262">activate Article 50 swiftly</a> and to commence the talks towards the two-year period of exit negotiations.</p>
<p>The UK needs to provide clarity to its partners (and internally) and start negotiating its relationship status with continental Europe and the rest of the world. </p>
<h2>Focus must be on an EU-Australia free trade agreement</h2>
<p>Autonomy from the EU means the UK will not be able to count on the joint negotiating power of 28 countries in multilateral negotiations with the World Trade Organisation – or in the free trade agreement negotiations with the world, including an FTA with Australia that it won’t be part of, despite long-standing deep relations. </p>
<p>Autonomy - and the time it will take to reach it - will come at a very high price. The benefits of an <a href="http://ec.europa.eu/trade/policy/countries-and-regions/countries/australia/">EU-Australia Free Trade Agreement</a> will accentuate disadvantage to British and non-EU organisations in the UK.</p>
<p>Negotiations for the FTA were expected to start in early 2017, yet may experience some minor delay to assess the specific conditions that will be negotiated without the UK: the focus may slightly modify - the goal will not.</p>
<p>This FTA with the EU now needs to be the very focus of Australia’s attention. The somewhat nostalgic ideas of some that a British Commonwealth construct would re-emerge is not only erroneous and disconnected from geopolitical realities. It is also counter-productive as it diverts attention from applicable plans. The world is governed by a network of regionalised economic power centres.</p>
<p>The EU (as a whole) has been Australia’s largest economic partner for more than 25 years. It remains Australia’s third-largest merchandise trading partner, its second-largest source of imports (17% of total Australian imports) and fifth-largest market for exports. The EU is Australia’s largest trading partner in services. Also, the EU is the largest investor in Australia.</p>
<p>While 48% of Australia’s exports in services to the EU were via the UK, this pathway is changing. The UK will continue to abide by the current body of EU legislation for some time, yet it won’t have a say in decision-making any longer: none of the remaining members of the EU would take UK advice as to its stance on specific European policy any longer. </p>
<p>And, hence, divestment will take Australian interests closer to the overall decision-maker, the European continent. Financial services, constituting 80% of the British economy and the large proportion of Australian export to the EU, are now exposed to significant longer-term uncertainty. The resignation of Lord Jonathan Hill, the EU Commissioner for Financial Stability, Financial Services and Capital Markets Union, directly illustrates that. </p>
<h2>The huge task of unravelling ahead</h2>
<p>This FTA will thus take shape while the UK will be in the midst of negotiating a new relationship with the EU, reshaping its policies and legislation and negotiating new bilateral ties with the remaining 27 EU countries and the rest of the world. </p>
<p>It must negotiate the new conditions for each component it delivers into the global value chains, each tariff or non-tariff condition it had benefited from via the EU. It will juggle internal and external forces to try to retain inward foreign (non-EU) investment into the UK and redefine those funding sources that, to date, were directly or indirectly linked to the EU. </p>
<p>In addition, the UK will be very busy negotiating internally. This will be run by a UK government that will have to deal with voters’ disappointment, as “Leave” voters come to realise the truth about Brexit consequences – many had not done their homework prior to casting their vote. </p>
<p>If Brexit was about autonomy from EU decisions, then the UK has to decide what legislation will apply in the future, draft, decide and adopt them. What financial and economic regulations will apply? How to support the City in the transition? What status to provide the many EU and other foreign residents with? What access to the Common Market will still be possible – and accepted by the EU? How to deal with the outsider status and how to align to other political and economic structures in the world? How to deal with exit from the EU’s multiple free trade agreements and their favourable conditions negotiated across the world?</p>
<p>At the same time, Scotland - and probably Northern Ireland - are bound to plan for a vote of their own people on leaving the UK and remaining in the EU. Could an independent Scotland provide an alternative for services? Yet, again, a long period of uncertainty will handicap any such move in the short - to- medium term.</p>
<p>Some speculate that Brexit will be the end of the EU and European integration. That it may be the end to Austrialia-EU FTA negotiations. </p>
<p>That is not likely: Rather, we will see a more integrated and more diverse Europe. Australia, as part of the FTA with the EU, will be stronger. Business advocates for certainty and for sustainable trade relations, as the EU offers them.<br>
Even if maybe other EU members would exit, those remaining will be stronger because their commitment is enhanced as Brexit turns into Bregrets. </p>
<p>This will be a more <a href="https://pursuit.unimelb.edu.au/articles/brexit-the-european-point-of-view">open and dynamic Europe</a> in which members will support each other increasingly. Because with the UK – the “functionalist”- turning into an outsider, the usual barrier against deeper integration steps out of the way for the benefit of federalism. </p>
<p>Ultimately, the question is: Will the ‘United Kingdom’ survive?</p>
<p>And on a global level: What is the future for the multilateral approach to solving cross-border complex challenges? The FTA between the EU and Australia will be timely, effective, economically powerful and cohesive.</p><img src="https://counter.theconversation.com/content/61676/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gabriele Suder received funding from the European Union in a previous role.</span></em></p>Any sentimental colonial ties should be put aside; Australia’s best trade chance lies with Europe.Gabriele Suder, Principal Fellow, Faculty of Business & Economics/Melbourne Business School, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/240642014-03-09T19:33:23Z2014-03-09T19:33:23ZViewpoints: should ratings agencies be responsible for inaccurate ratings?<p>One of the world’s largest ratings agency, Standard & Poor’s, is <a href="http://www.abc.net.au/news/2014-03-03/standard--poors-appeals-landmark-ruling-in-favour-of-councils/5293740">back in court</a> appealing the Federal Court’s <a href="http://www.abc.net.au/news/2012-11-05/councils-to-recoup-gfc-loses-after-court-ruling/4353000">landmark decision</a> that it was responsible for the losses incurred by 13 New South Wales councils.</p>
<p>The local councils made losses on investments in complex instruments that had S&P’s coveted AAA rating. But the company told the ABC it was “not responsible for investment decisions and investors need to do their own analysis”.</p>
<p><em>In this Viewpoints, Binoy Kampmark argues investors should know ratings aren’t guarantees on risk; while Gail Pearson makes the case that investors expect the ratings to have a reasonable basis.</em></p>
<hr>
<p><strong>Binoy Kampmark:</strong> The question here is one of accountability, and what generates it. These are both ethical and legal questions. Credit rating agencies pride themselves on setting measurements about the financial health of assets, and more broadly, of a financial system. </p>
<p>These can have considerable economic impacts, none of which directly affect the ratings agency in question.</p>
<p>During the global financial crisis it became clear that these financial assessments were made without oversight. But is relying on these assessments without due diligence irresponsible in its own right? </p>
<p>It was clear that the credit mechanism being used in this case – the Constant Proportion Debt Obligation notes (CPDOs) – was unstable. <a href="http://www.federalreserve.gov/pubs/feds/2010/201005/201005pap.pdf">Even economists at the US Federal Reserve admitted as much</a>. </p>
<p>That these local councils were relying on just these assessments as statements of fact rather than assertions of opinion should itself be a cause for concern.</p>
<p><strong>Gail Pearson:</strong> The issue of the reliance of the local councils is very important. But what were they relying on? They were relying on the expertise of their investment adviser – who was not the ratings agency – and they were also relying on the AAA rating given by the ratings agency. </p>
<p>I’m not sure about Binoy’s distinction between opinion and fact. The local councils knew there was risk in investing. They knew that there was a potential for loss. So they were relying on an assessment by the ratings agencies about the nature of that risk.</p>
<p>Part of the question is whether they were in a position to assess the risk of these very complex products for themselves. They weren’t. </p>
<p>It seems there was nothing in the documentation they received that indicated the extent of the risk. Assessment of investment risk is highly complex and technical. This is why investors rely on ratings agencies.</p>
<p>In any case, the distinction between fact and opinion is not very helpful to those who provide opinions that are not based on reasonable grounds. </p>
<p>We have, in Australia, a very well developed jurisprudence around the prohibition on conduct that is misleading or deceptive or likely to mislead or deceive. This prohibition exists in a number of pieces of legislation.</p>
<p>You fail to live up to this norm of conduct if you express an opinion without reasonable grounds for that opinion. If investors rely on the opinion of those who provide investment advice or those who grade an investment product, they are entitled to assume that the persons providing that opinion have a reasonable basis for what they are saying.</p>
<p>So the question comes back to whether ratings agencies, when they provide a particular rating, have a reasonable basis for saying that it has three gold stars or none. </p>
<p>It is not unlike ratings given in other contexts – think hats for restaurants or stars on travel websites. There must be a reasonable basis for the opinion. That was the issue here.</p>
<p><strong>Binoy Kampmark:</strong> Gail makes the vital point on reliance. What were the local councils relying on? Advice from investment advisors, and the AAA rating from S&P. </p>
<p>It is true that opinion matters, and that opinion can then cause the person investing to rely upon it. In that sense, an opinion or a fact is one of those fabulously opaque areas of legal deliberation.</p>
<p>But we should be careful that, in so doing, we are not painting the councils involved as vulnerable and entirely at the mercy of an S&P rating. </p>
<p>While the entire business of ratings is shoddy, they are not, <a href="http://www.standardandpoors.com/regulatory-affairs/ratings/en/us">in the words of S&P’s disclaimer</a>, “statements of fact or recommendations to buy, hold, or sell any securities or make any other investment decisions”.</p>
<p>There may be more to be said about the specific parties who marketed the CPDOs and gave undertakings about their reliable value. That would just be patently silly, but it does happen in the world of finance.</p>
<p>The assessment of investment risk is highly complex. But converting assessments into guarantees is as reliable as astrology. </p>
<p>We can choose to pay for those services, but we cannot hope that those predictions will come true. There are simply too many factors at stake. </p>
<p>The law on deceptive conduct is highly developed in Australian commercial law, but there are also instances where a person was irresponsible to be deceived in the first place. </p>
<p>Public bodies like local councils, using the money of ratepayers, must also be wary of the sorts of investments they seek. </p>
<p>The financial crisis, with its revelations of the risk in highly complex investment structures, showed how flawed government and private institutions could be in their decisions. S&P’s ratings work is but a symptom of that culture.</p>
<p><strong>Gail Pearson:</strong> But were the local councils irresponsible? It is easy to say in retrospect when they lost a lot of money that they did not do the right thing. </p>
<p>The local councils did understand that they were investing in a product with risk. They believed they were receiving sound advice from a trusted advisor and that this advice was reliable as it was linked to a rating from one of the world’s leading bodies that rates risk in investment products. </p>
<p>To say they were irresponsible might be to say that we can never trust or rely on any expert of whatever kind – very hard in most contexts.</p><img src="https://counter.theconversation.com/content/24064/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>One of the world’s largest ratings agency, Standard & Poor’s, is back in court appealing the Federal Court’s landmark decision that it was responsible for the losses incurred by 13 New South Wales…Gail Pearson, Professor, Business School, University of SydneyBinoy Kampmark, Lecturer in Global Studies, Social Science & Planning, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/184782013-09-23T03:54:16Z2013-09-23T03:54:16ZGST rebuff and credit downgrade add to Barnett’s annus horribilis<figure><img src="https://images.theconversation.com/files/31762/original/tkkws87t-1379903350.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Despite his electoral success earlier this year, WA premier Colin Barnett has suffered a string of economic blows - the latest being a credit rating downgrade and the rejection of his proposed raise in the GST.</span> <span class="attribution"><span class="source">AAP/Theron Kirkman</span></span></figcaption></figure><p>2013 hasn’t been a good year for Western Australian premier Colin Barnett. Standard and Poor’s <a href="http://www.businessspectator.com.au/news/2013/9/18/australian-news/wa-loses-triple-credit-rating">recent downgrade</a> of his government’s credit rating continues a pattern. It is not an aberration.</p>
<p>Barnett’s <a href="http://www.abc.net.au/news/2013-09-20/colin-barnett-calls-on-tony-abbott-to-increase-gst/4970024">repeated calls</a> in recent days for an increase in the Goods and Services Tax (GST) were <a href="http://www.news.com.au/national-news/tony-abbott-stands-firm-on-gst-as-wa-premier-colin-barnett-pushes-for-increase/story-fncynjr2-1226723947645">promptly quashed</a> by a spokesman for prime minister Tony Abbott.</p>
<blockquote>
<p>There will be no change to the GST, full stop, end of story.</p>
</blockquote>
<p>And let’s be clear about this: at no stage during the recent federal election did Tony Abbott suggest that the system for distributing GST funding would be revised to ensure that WA got a bigger share of GST revenues. So anyone expecting that the problem will be fixed through increased GST funding is fooling themselves.</p>
<p>The downgrade is undoubtedly the worst of the calamities that have befallen Barnett’s government, not just because it points to ongoing problems for the state’s finances. This is not just about the extra A$20 million a year it will cost to raise money. It is about declining revenues from mining royalties and ongoing problems with meeting the infrastructure needs of a growing population.</p>
<p>The most troubling aspect of Standard and Poor’s downgrading for Barnett, though, is that it was based on the view that he and his government had limited political will when it came to returning the budget to surplus. This undoubtedly reflects the fact that Barnett had to reverse two measures that would have saved over $170 million in this year’s budget.</p>
<p>The more embarrassing <a href="http://www.watoday.com.au/wa-news/colin-barnett-backs-down-over-solar-panels-20130812-2rrkq.html">reversal</a> involved not retrospectively cutting rebates to solar power users who returned energy to the grid. Reducing rebates that induced people to install systems after the event just seemed wrong to everyone.</p>
<p>The more interesting aspect of the downgrading is that it reveals Barnett’s deep inconsistency. On one hand, he promotes his government as a sound economic manager. This means they balance their budgets. He has even said that he will <a href="http://www.afr.com/p/national/budget_crunch_hits_boom_state_oE89ZO6JsRHRDEAH8W2QIM">not preside</a> over a government that delivers a deficit budget.</p>
<p>On the other hand, Barnett promotes his government (and particularly himself) as a champion of development. This requires government investment in infrastructure. When your revenues are falling, that means going into deficit.</p>
<p>Standard and Poor have not revealed some minor problem. They have pointed to a continuing headache for Barnett, and for Abbott, as Barnett will have to blame someone else for the problems.</p>
<p>If only it wasn’t just another in a series of problems Barnett has had to face this year. The year started quite well for Colin Barnett. He led the Coalition to a <a href="https://theconversation.com/wa-election-barnett-and-the-liberals-do-it-easy-12470">decisive election win</a>. The Liberals even won enough seats to govern in their own right, though they were never going to do so. But the win wasn’t as big as it might have been. I was amongst those who thought that this was a result of Barnett’s lacklustre performance during the election. Journalists were even calling his office to see whether he was sick.</p>
<p>Barnett had only been in office a month when Woodside decided <a href="http://www.perthnow.com.au/news/western-australia/woodside-will-not-go-ahead-with-an-lng-processing-plant-at-james-price-point/story-fnhocxo3-1226618536271">not to go ahead</a> with a gas processing hub at James Price Point. Barnett had pushed very hard for this development. It deeply - perhaps permanently - divided the local community and offended environmentalists around the state.</p>
<p>Barnett accused Woodside of letting people down, though Woodside had never formally committed to developing the site. It was for Barnett and not for Woodside that the project had to go ahead. The project’s demise was not a good “look” for champions of development.</p>
<p>Then the Oakajee Port development <a href="http://www.abc.net.au/news/2013-06-14/oakajee-port-and-rail-project-suspended/4754986">was suspended</a> in June. This was mainly a private development, but the government had invested plenty in it, both in money and reputation.</p>
<p>After that, the Barnett government had to admit that it had wasted over $250 million trying to <a href="http://www.abc.net.au/news/2013-06-25/work-on-muja-power-station-suspended/4779722">rejuvenate the Muja power station</a> near Collie in southwest Western Australia. It turns out that corrosion in the piping has always been so bad that the station will never operate at full capacity.</p>
<p>Barnett remains secure, but mostly because he lacks legitimate challengers within the Liberal Party. Christian Porter’s <a href="http://www.perthnow.com.au/peace-christian-porters-federal-gamble-pays-off/story-fnhocq8b-1226714504468">move into the federal sphere</a> took Barnett’s obvious successor out of state politics. Kim Hames is deputy premier and an obvious contender. The fallout from his <a href="http://www.abc.net.au/news/2013-07-22/barnett-announces-hames-resigning-as-tourism-minister/4835916">resignation as tourism minister</a> - due to (minor) problems with his claims for ministerial travel allowances - is yet to clear, though. The time may even come when Troy Buswell stops ruling himself out as a potential leader of the party.</p>
<p>Few people will be cheering louder for Fremantle in this weekend’s AFL Grand Final than Colin Barnett. Not because he is a dyed-in-the-wool Freo supporter (he seems more of an Eagles fan to me), but because he needs something to go his way in Western Australia.</p><img src="https://counter.theconversation.com/content/18478/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian Cook does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>2013 hasn’t been a good year for Western Australian premier Colin Barnett. Standard and Poor’s recent downgrade of his government’s credit rating continues a pattern. It is not an aberration. Barnett’s…Ian Cook, Senior Lecturer of Australian Politics , Murdoch UniversityLicensed as Creative Commons – attribution, no derivatives.