JOHANNESBURG – Losing its investment grade credit rating would be “the best thing that ever happened to South Africa”, sounding the wake-up call that would create a mandate for change in the country, according to chief economist and CIO at Saxo Bank, Steen Jakobsen.

After Standard & Poor’s downgraded South Africa one notch to BBB- on Friday 13, it is now only one downgrade away from ‘junk’, or non-investment grade rating. Keeping its rating at BBB, Fitch Ratings changed South Africa’s outlook from stable to negative on the same day – an action that usually precedes a downgrade.

“If you lose investment grade you’re done,” Jakobsen said, addressing journalists at Saxo’s Johannesburg office on Thursday. Global fixed income managers would not be able to “touch the country”, he said, since they were mandated to include only investment-grade government bonds in their portfolios.

Jakobsen said a downgrade would increase financing costs by 200 to as much as 500 basis points and could see a 40% correction in the JSE.

Like many European countries, South Africa has enjoyed the years of “riding the Chinese tiger”, but failed to invest the proceeds of the Asian giant’s once mammoth appetite for commodities. Now that China is pulling back on production, its growth is slowing and demand for our resources has dipped, South Africa can no longer spend what it once could, especially in such a low growth environment.

Entitlement stifling productivity

“The micro story is a good story. But the macro story is so bad that inevitably it needs to fail,” Jakobsen continued. He said that money was leaving the country because the economy was unproductive. The restructuring that would follow a failure would boost productivity levels and eventually cause money to flow back into the country.

“South Africa is stuck in a Bermuda Triangle of economics, running from a high stock market valuation to high unemployment to low growth/productivity, kept in place by entitlement and non-change,” Jakobsen said.

When more than 50% of the population benefit directly from state welfare, democracy comes under attack and a non-change dynamic is created within an apathetic and entitled society, he added. “[In South Africa], protectionism is a more important concept than progress,” Jakobsen said. Companies were penalised for importing steel, for example, while government failed to address the fact that local manufacturers were uncompetitive.

President for a day

So what would Jakobsen do if he were President of South Africa for a day? “Immediately implement an SME plan with incentives; insist that whoever adopts the risks related to resources or land should also reap the benefits; and pass a law that says for every new law passed two laws must be removed.”

“There are too many ideas and choices. [South Africa] needs to simplify and ask what is the elevator pitch for the country for the next 30 years?”

Since the most potent fiscal multiplier was to create jobs, Jakobsen stressed the need for capital gains and tax advantages for private investment into education and small businesses. “Give private money an incentive to be part of the solution, don’t penalise them for being part of the profit,” he said.

“Allow the micro story to become the supply side of your economy and move away from thinking that Zuma or the Central Bank will do anything for you,” he said.

According to Jakobsen, Brazil, Russia, India and China (BRIC) have all experienced macro failures of some kind in the last 50 years. Perhaps South Africa’s time has come.