The Upside of Junk

Published on   March 29th, 2020   |   by   Isaah Mhlanga and Vusi Thembekwayo

The Upside of Junk

By Vusi Thembekwayo & Isaah Mhlanga

As the 27th March midnight approached, many South Africans slept away the reality of their first day on government-imposed lockdown. The mood the country mirrored the moment, somber solace and fear.

News broke first on Bloomberg Terminal that international credit rating agency Moody’s had downgraded South Africa’s long-term foreign and local currency credit ratings to Ba1. Commonly known as junk status, this is the first level into sub-investment grade. It brings the country into the unwanted terrain of the investment boogieman that many politicians and investment professionals alike had long since feared. Adding salt to the fresh wound, Moody’s (whose name should not be read to reflect its demeanour) left the outlook on negative, signaling a low probability of a review of the rating into investment grade in the short-term, and extinguishing any hope of a quick recovery.

This effectively completes the trio of the major credit rating agencies rating South Africa as a sub-investment credit. Fitch moved the country’s credit rating at BB+, with a stable outlook, back in 2018, which is equivalent to the recent Moody’s credit rating while Standard and Poor’s credit rating at BB is two notches into sub-investment grade. The loss of investment-grade should not be a surprise to policymakers, market pundits and businesspeople alike as the deterioration in the economy, lack of policy certainty, slow implementation of economic reforms such as the ones proposed in the National Treasury economic policy paper in 2019,  and the high inequality has been in plain sight for anyone that cared to open their eyes.

Now, more than ever, South Africans have to address the issues that bring about these obscene levels of inequality & a structurally inefficient economy.

Our intention with this essay is not to ventilate well-known arguments and reasons for the decline but rather to shift the narrative (away from finger-pointing) toward a trajectory which seeks to expose the positives that can come out of our multiple crises: alarmingly high unemployment, a no-growth economy, the health and economic crisis of COVID-19 and now, junk status.

1.   Re-organize the Economy

South Africa’s economic and social structure is abnormal and unsustainable.

The spatial planning, which is a legacy of Apartheid and a reflection of the failure by the new government to redress this phenomenon at scale and with speed are mirrored in the economy. Over the past quarter century of democratic-rule, solutions touted and implemented have simply not been forceful enough. Whilst exemplary, South Africa’s social security program which supports the disabled, the aged, the indigent coupled with the various iterations of BBBEE have frankly bandaged over the deep structural flaws of how the economy and society are organized.

Both these were deliberately organized in this way and require the same level of fortitude to reorganize now. Absent of this, these imbalances will not only persist, but like the COVID19, spread and their effects harder to curb. This is because many of these imbalances birth inter-generational issues. Poorly educated citizens, with low access to credit, who are unemployed and of poor health need the intervention of the state to aid their meaningful participation in the economy. Without this, they too will raise citizens who are poorly educated, indigent and as a consequence unemployed.

This is how poverty & inequality is inherited and multiplies.

2.   The COVID-19 gift & One-Country Two-Systems

Whilst any loss of life is tragic, the unwanted gift of COVID-19 to South Africa is that it made glaring the deep inequalities of South Africa. Like Hong Kong, South Africans live in a One-Country-Two Systems state.

The pictures that made the social media rounds of the panic buying that ensued following the President’s initial speech declaring a State of Disaster are in stark contrast to visuals that have been beamed on our TV screens since the lockdown. For the poor and disenfranchised, the option to panic buy is still not available owing to their meagre incomes. So, they crowd the often poorly kept malls, are marshalled into corner-hugging queues in the hope of buying enough groceries to last this period.

The coming pain from the downgrade to junk status and economic impact of COVID-19 will expose these flaws more explicitly and all of society needs to respond. We have a once in a generation opportunity to restructure the economy right and for the broader good.

3.   The Apartheid playbook.

Whilst an abhorrent system, there are some lessons we can learn from the architects of Apartheid. Recognizing the approaching wave of global disapproval, they built the economic model of South Africa around import substitution.

Theirs was a simple playbook: make the country self-sufficient & net exporter of critical economic outputs.

For synthetic fuels to fire up the economy, they established Sasol. For steel to build the infrastructure they established Iscor. For arms to weaponize the state, the established Amscor. For electricity to power-up industries, they established Eskom. And for transportation as well as the construction and management of ports and rail to ensure that goods could reach both the west and east coasts of our vast country, they established Transnet.

Whether by design or luck, these helped make South Africa self-sufficient under global sanctions.

Let’s be clear, apartheid was a crime against humanity, which created the very social and economic structure we must now dismantle. But the lesson is simple and evident, built an economy that has the internal capacity to forge growth. Many of those firms still exist today.

4.   What about be our Junk Status playbook?

Junk status means that external funding will dry-up, our capital markets will become more speculative, the currency more volatile and as a result, funding may be excessively expensive. Prescribed assets, it seems, are now a consideration we must make beyond our narrow political perspectives.

South Africa’s policymakers are in an invidious position. The country is in a quagmire. But, have no doubt, we have been here before. If we dig deep into our collective memory as a country (easily our most resilient resource) we will find the solutions to our problems.

For the past 25years, we have painted over the cracks of our deeply painful past. We conducted a “truth and reconciliation commission” for the economy and called it BEE. Like the TRC, the scheme has had very limited successes & failed to broaden economic access whilst building the real economy.

So, what should our playbook be? Here are some options.

1.    Rethink Banking & Access to financial services

In quantum, South Africa has the second-largest middle class in Africa and the most advanced financial markets system. Morocco has been eroding our lead in recent years, but we are still narrowly ahead. Yet given this, we have the least competitive banking sector. Consider the evidence, Kenya has 44 banking institutions serving a population of 49million, Uganda has 15 banking institution serving a population of 43million, 25 banks in Nigeria serving a population of 191million.

It is any wonder then that some of the innovative banking products like mobile money emanate from Kenya, the country with the most competition.

Perhaps the time is ripe for the South African Reserve Bank’s mandate to be expanded to include the fostering of competition in the banking sector rather than narrow mandate of price stability.

More banks, more competition, more products, more innovation.

2.    Deepen a culture of venture funding

South African DFIs are notoriously difficult to access capital from. This is the lived experience of many small businesses and entrepreneurs that have attempted a capital raising exercise. Many of the processes are seen as cumbersome, the systems inefficient and the criteria mute to the environment many of these entrepreneurs are operating in.

What is needed is more innovation in venture funding. More DFIs should consider partnering with operating VCs – perhaps through a partnership with SAVCA – that can broaden access to early-stage high-risk funding instruments for the most daring of ventures and ideas.

DFIs should also reconsider the weighting of success matrix away from the current matrix which is over-weight on financial returns toward social returns such as access to healthcare, access to education, a decent wage or job security.

3.    Open-up markets for SMMEs

Market access is the most difficult aspect of a business growth strategy to unlock for SMMEs. Contractual relationships tend to be firmly entrenched between the owners of big businesses & procurement heads. The efforts of many transformation departments tend to lose steam when it comes to convincing their procurement colleagues of the national imperative of meaningfully broadening economic participation. As a result, the parts of the procurement budgets that tend to get transformed are those of less critical goods which are often price-sensitive discretionary purchases.

Where SMMEs lack funding they have new ideas and innovations that can be very meaningful in how we unlock the economy.

Growing small and medium businesses must be part of the mandate of the procurement department heads if we are to truly achieve market access.

4.    Re-prioritize SOE funding models

The issue of SOEs is a deeply divisive issue for South Africans. Whilst there is unanimity on the need to stem the scourge of corruption, a virus that has found its most receptive host in the budgets of SOEs, there are far too many ideological albatrosses on the discussion of whether South Africa should disband or privatize these.

Not only that but these are so deeply embedded in our society through fear-mongering and sloganeering that just the mere mention of SOEs conjured up deeply emotional and visceral responses from almost all South Africans.

That notwithstanding, South Africa will be forced to reprioritize funding toward mission-critical deliverables of the national agenda. Which will force once and for all to agree on this question, “what is out national agenda?”

5.    Recapitalize our health & education systems

The truism of our COVID-19 national experience is that our public health system is grossly unprepared for a pandemic breakout & perhaps under-resourced. Whilst the Minister of Health’s visibility throughout communications to the nation has been reassuring, the underlying system of health in South Africa still needs a rethink and redesign.

Burdened with the influx of migrants from other parts of the continent, the system needs a rethink to ensure quality healthcare & reasonable access for all citizens.

The National Health Insurance may be welcomed relief for many South Africans outside the system of funded medical insurance, but its success will hinge on how well it administered. The restrictions of NHI bill as at current will force even those that could afford to self-insure to consider the lived reality of their fellow citizens.  Like e-tolls, the NHI has the potential to galvanize all South Africans to insist on better quality services from the state.

6.    Embrace digital

Over the past two years, the phrase 4IR has become the go-to mantra of politicians and policymakers the world over. As South Africans are wont, we have abused this phrase in speech but have taken very little tangible action by way of readying the state to exist in a digital world.

Schools, airports, hospitals & clinics, municipal services and police have remained analogue and off the digital grid in a world that is fast outpacing our rate of technological innovation. Even the now abandoned Department of Home Affairs project WAIO (Who Am I Online) fell afoul of shifting sands of politics when Zuma replaced Mbeki as President of the ANC in Polokwane and was never commissioned to the public.

The migration of television from analogue to digital was conceptualized after the withdrawal of the VIVID platform by Sentech in 2005. For context, VIVID was the only other set-top box that could meaningfully compete with the Multichoice product. Yet today, 15 years later, digital terrestrial television is still a discussion point in the lobby hallways of parliament. Some say it is the subject of much debate amongst former revolutionaries turned capitalists during clandestine meetings where a tot of port, sherry and the aroma of cherry flavored cigars drift gracefully through the air.

Police stations still take statement and log cases manually.

Hospitals still take records on paper.

Schools still need classrooms to teach.

It’s a sad affair. A toll tale about a country who citizens desperately need services & whose technocrats know what need to be done, but for the interference of politics, never seem to complete critical projects.

Perhaps our saving grace, this 21-day lockdown and the resulting “Coronavirus effect” will be a country forced to accelerate the technology adoptions by the state and lowering of access barriers for citizens through lower costs. Perhaps this is our new normal.

South Africans have long since known the advantages of technology and the internet. Follow a trend on your favorite social media platform & you will see how South African humor, hope and heart find expression every day.

The world wide web has allowed to see through the façade of our upbringing into the daily lived realities of our fellow countrymen. It has forced us to confront our injustices and collectively comfort our shared pains.

Riding this wave have been institutions like UNISA which has digitized its learning platform & revolutionized its student-experience. Admittedly behind the curve of Europe, China and the US, the use of technology is welcome relief from learners who no-longer have to brave the Pretoria traffic to access learning.

Unisa has been ahead of the curve in the South African context.

In healthcare digital record storage will increase efficiency and reduce costs. The magic password, your unique ID number, will be all what one needs to access medical record at any health facility across the country, which will help in getting accurate medical health records throughout a person’s life.  A byproduct of this is that there is near perfect data for medical research purposes.

In business a decrease in physical meetings, less traffic congestion and more savings on transport costs. These savings will allow household to direct those funds toward other more important aspects of their budgets.

Remote work will be embraced as the new reality & office rental costs massively reduced for start-ups and high-growth businesses.

There are many opportunities for South Africa to take advantage of during this time. The world is sufficiently preoccupied that we could pass through some of the more radical economic and social policies without raising the eyre of the world.

Dear South Africans, now we truly have nothing to lose. Let’s not lose this opportunity.


Co-authored by:
Vusi Thembekwayo
(Managing Partner, Watermark Afrika Fund & CEO, MyGrowthFund Venture Partners)

Isaah Mhlanga
(Chief Economist, Alexander Forbes)


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Siphesihle Thusi (16:07:02 - July 15th, 2020)

This is absolutely amazing, very thoughtful article. I seriously think, it is now time for Economist and business need to become more vocal and to start leading us because politicians are often confused the needs of the economy and with thier politicial agenda.

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Siphesihle Thusi (16:07:03 - July 15th, 2020)

This is absolutely amazing, very thoughtful article. I seriously think, it is now time for Economist and business need to become more vocal and to start leading us because politicians are often confused the needs of the economy and with thier politicial agenda.