DOWN­GRADE WHERE TO NOW?

The low­er­ing of SA’s credit rat­ing by S&P Global and Fitch has un­leashed fears of dwin­dling busi­ness con­fi­dence, which could harm growth prospects

CityPress - - Business - JUSTIN BROWN justin.brown@city­press.co.za

The ef­fect on in­vestor con­fi­dence in South Africa is the main con­cern aris­ing from the down­grad­ing of the coun­try’s credit rat­ing by S&P Global and Fitch Rat­ings to “junk” sta­tus this week, fol­low­ing Pres­i­dent Ja­cob Zuma’s Cabi­net reshuf­fle. This is be­cause in­vestor con­fi­dence will af­fect eco­nomic growth and employment.

The results of the down­grade will only be­come clear in the weeks and months ahead.

Jef­frey Schultz, an econ­o­mist at BNP Paribas, said in­vestor con­fi­dence would take a hit from the down­grade and this would harm fixed and for­eign di­rect in­vest­ment.

Ned­bank econ­o­mist Isaac Mat­shego echoed these sen­ti­ments, say­ing growth would be a key fac­tor re­lated to busi­ness con­fi­dence.

“The ef­fect on busi­ness con­fi­dence is the big­gest risk fol­low­ing the down­grade,” he said.

The SA Cham­ber of Com­merce and In­dus­try an­nounced this week that its busi­ness con­fi­dence in­dex had pulled back by 1.7 in­dex points to 93.8 in March.

“This busi­ness read­ing would not have cap­tured re­cent de­vel­op­ments,” Mat­shego said.

The big­gest im­me­di­ate ef­fects of the down­grade have been the rand’s de­pre­ci­a­tion and the loss of bil­lions of rands in the value of lo­cal bank­ing stocks.

The down­grade has also put on ice hopes of a cut in lo­cal in­ter­est rates.

The agency moved on the down­grade fol­low­ing Zuma’s de­ci­sion to reshuf­fle his Cabi­net last week.

The de­ci­sion in­cluded re­plac­ing former fi­nance min­is­ter Pravin Gord­han, in whom in­vestors had con­fi­dence, with Malusi Gi­gaba.

Schultz said Moody’s In­vestors Ser­vice was also likely to down­grade South Africa’s rat­ing in com­ing weeks.

South Africa’s ma­jor banks – Bar­clays Africa, Capitec, FirstRand, Ned­bank and Stan­dard Bank – col­lec­tively lost R134 bil­lion in mar­ket value from March 27 un­til April 7.

On the morn­ing of March 27, the rand had strength­ened to R2.31 to the dol­lar, be­fore the news broke that Zuma had in­structed Gord­han to re­turn home from an in­ter­na­tional road­show.

When the news was an­nounced, the rand lost as much as R1.62 to the dol­lar. Our cur­rency was quoted at R13.81 to the dol­lar on Fri­day.

Schultz said the rand was likely to main­tain its weak­en­ing trend and would prob­a­bly be quoted to above R14 to the dol­lar by year-end.

Moody’s, which has South Africa two notches above junk sta­tus, also put the coun­try’s credit rat­ing on re­view for a down­grade this week.

The agency is likely to an­nounce the re­sult early in May or by early July at the lat­est.

Fitch has ex­pressed con­cern that the Cabi­net reshuf­fle could weaken public fi­nances and stan­dards of gov­er­nance.

The agency in­di­cated that it was con­cerned that Gi­gaba would fo­cus on rad­i­cal so­cioe­co­nomic trans­for­ma­tion, which has been de­fined as changes “in the struc­ture, sys­tems, in­sti­tu­tions and pat­terns of own­er­ship, man­age­ment and con­trol of the econ­omy in favour of all South Africans, es­pe­cially the poor”.

Mat­shego said the bank had not yet changed its growth fore­cast of 1% for 2017.

“The sit­u­a­tion is un­cer­tain and we do not know what will tran­spire. We will wait for things to set­tle,” he said.

This week, S&P Global kept its fore­cast for South Africa’s growth un­changed at 1.4% this year and 1.8% in 2018.

The agency is also ex­pect­ing South Africa’s un­em­ploy­ment fig­ure to drop slightly to 26.3% next year from 26.5% this year. Schultz said the trend of poor growth was likely to con­tinue.

Tinyiko Ng­wenya, an econ­o­mist at Old Mu­tual In­vest­ment Group, said S&P Global had down­graded South Africa be­cause of po­lit­i­cal un­cer­tainty and its ef­fect on the fis­cus.

Ng­wenya said al­though Gi­gaba had in­di­cated that there would be no change in fis­cal pol­icy, this was “all talk” at this stage. It needed to be backed up by “hard data” and ev­i­dence. In May last year, Stan­dard Bank econ­o­mist Goolam Bal­lim said S&P Global’s de­ci­sion to place South Africa’s credit rat­ing at sub-in­vest­ment grade would un­leash a “shock” that could knock the coun­try into re­ces­sion and place 200 000 jobs – plus a fur­ther 600 000 re­lated de­pen­dants – at risk.

How­ever, Schultz said he did not be­lieve that this week’s down­grade would re­sult in a re­ces­sion, at least not this year.

In May, Bal­lim had also said fi­nan­cial mar­kets fac­tored in credit down­grades to some de­gree, but that the “real econ­omy, where the in­come and employment man­i­fest”, would be in for a ma­jor ad­just­ment be­cause of a credit down­grade.

He added that al­though fi­nan­cial mar­kets tended to con­vulse be­fore a down­grade, the “real econ­omy smashes af­ter­wards”.

Mat­shego said: “It is all about the cur­rency. There are fears that there will be a no­table shift in gov­ern­ment pol­icy, and then the cur­rency will come un­der pressure.

“The SA Re­serve Bank will be forced to hike in­ter­est rates, which in turn will af­fect growth rates.

“In some cases, such down­grades to sub-in­vest­ment level have caused re­ces­sions or a mild im­pact on growth.”

Af­ter the down­grade was an­nounced, the ef­fect on the rand’s ex­change rate had been muted as a lot had al­ready been fac­tored in, Mat­shego said.

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