Standard & Poor's Global Ratings announced that it has downgraded South Africa's long-term foreign currency credit rating to below investment grade, or to 'junk status' as it is known. How will this affect poor people?
The oldest trick in the capitalist playbook is to make the system and its consequences seem unavoidable. What will the ratings downgrade mean for the poor? The truth is we do not know, because the likely consequences can be avoided. Ultimately, the consequences of the downgrade for the poor will be decided by the outcomes of conflicts and contestations. On the one side are the poor and their allies, and on the other are the rich elites seeking to use the downgrade as an opportunity to extract more wealth and power from the poor.
The issues around which these conflicts will be fought are rising prices of basic necessities, deteriorating social services, rising interest rates on loans, wage freezes and ultimately retrenchments. Already the elite alliance between business, state officials, academics and the media is propagating the unexamined line that these are the inevitable consequences of the downgrade. It is simply not true.
Ratings downgrades are one of several strategies that form part of neoliberal financialisation – a system designed and imposed since the 1970s for the owners of banks and finance capital generally to make ever greater profits at the expense of everyone else, especially the poor.
The downgrade is an opinion of the ratings agency that the South African government is likely to default on paying its debts, something that is unlikely in the foreseeable future. When the government wants to borrow money, either by taking out loans or selling government bonds, the lenders will use the downgrade as a reason to insist on higher interest rates on the loans to compensate them for a higher perceived risk. In the first place, therefore, these lenders who generally are among the wealthiest individuals and institutions in the world, will make significant extra profits paid for by taxpayers as a direct result of the downgrade. We do not know exactly how much extra they will make, but we do know that they will use all means to make it as much as possible. The result depends on contestation and resistance.
How does this downgrade and the consequent rise in the cost of borrowing for government lead, for example, to rising prices of basic necessities? Nowhere in all the commentary is this explained. Maybe the assumption is that it is too obvious to need explanation. A closer look, however, shows that this is more likely a deliberate silence about a plain shakedown operation by some of the richest businesses in the country.
Government can however decide to impose further taxes, to make up for the financing gap. In this case, the tariff will be passed on to workers through a reduction in wages and consumers through an increase in the price of commodities-inflation. As stated earlier, it is more of a choice than a consequence.
Most people in South Africa buy their basic necessities in supermarkets owned by the big five supermarket chains that dominate the food system. The ratings downgrade does not increase the cost of borrowing for them, only for the government. They therefore do not have this as a reason to put up their prices. In any case, these supermarket chains are cash rich and do not run their businesses on loans. But they will put up their prices anyway. This is not an unavoidable result of the ratings downgrade.
It is the superrich using the downgrade as an opportunity to squeeze more wealth out of people, with the poor the most affected.
It is the superrich using the downgrade as an opportunity to squeeze more wealth out of people, with the poor the most affected. The size of the coming rise in prices will ultimately be determined through struggle. It is up to poor people, and especially Black women who will be most affected, to mobilise against this shakedown operation.
Defenders of the Ackermans and Christo Wiese might say that the drop in the value of the rand will raise the cost of imports for the supermarkets. This is true for some goods. However, very few basic necessities are imported. Yet, if left to do what they want, the supermarket billionaires will raise the prices of everything and will do so much more than the effect of the drop in the value of the rand. This is what they have been doing for years. Raising prices when the rand drops and raising them again when the rand recovers, even for commodities like white maize that are produced in South Africa and whose rising price causes immediate starvation in poor communities. It is not unavoidable that poor people must pay the price for the drop in the value of the rand. It will be determined by struggle.
What about the expected deterioration of social services? The idea here is that the higher interest rates for government that result from the ratings downgrade means government must spend more on debt repayment and will therefore have less money to spend on services. However, this does not mean worse social services are inevitable, it is a policy choice. In the alternative, government can look at reducing fruitless and wasteful expenditure, reduce corruption in the public service and close loopholes in the tax system that allows multinational corporations a free ride.
If the ratings downgrade means less money is available for grants, why must the poor pay the price? Why not take these profiteers out of the grant delivery system?
The recent scandal about the government's handling of social grants showed how privatisation and financialisation of grant payments through speculation on stock exchanges and the peddling of unsecured loans made billionaire investors like Allan Gray and the World Bank main beneficiaries of these grants. Their cuts in the form of extortionate service charges, stock returns and exorbitant interest rates make up a huge part of the cost of grants. The same applies to the heavily indebted black middle class due to unprecedented increases in unsecured lending in recent years. If the ratings downgrade means less money is available for grants, why must the poor pay the price? Why not take these profiteers out of the grant delivery system? That option is there. Struggle and mobilisation will determine whether the portion of the poor or the rich will be cut.
The same is true of wage freezes and retrenchments. Businesses that rely on credit will argue they must freeze wages and lay off workers because of higher interest rates. The Reserve Bank will argue they must raise interest rates or keep them high to combat inflation or rising prices. Just one look at this circle of arguments should be enough to show that it is by no means inevitable; it is a political and business strategy to take from the poor and give to the rich. Interest rates rise to keep prices down, but prices rise because of rising interest rates, and workers' income must be pushed down because of rising interest rates. All businesses and their allied politicians will use these arguments, whether they depend on loans or not, and whether their viability will be threatened or not. The levels of interest rates, prices and wages will be decided by the outcomes of struggles and contestations. On the one side we have the workers, the poor and their allies, on the other the owners of finance capital, the state and their allies. The negative effects of this ratings downgrade on the poor is not unavoidable.