TOO SOON TO CELEBRATE MOODY’S DECISION
SA’s economic challenges have brought government, business and labour closer together in a cooperation drive
South African policy makers expressed relief when, in May, Moody’s left its credit rating for SA unchanged at Baa2 in what seemed like an upbeat assessment by the rating agency.
Unlike Fitch and Standard & Poor’s (S&P), Moody’s rating is two notches above sub-investment grade.
There is no room for complacency as the fact that the agency maintained a negative outlook on the rating means a downgrade will be implemented if the economy does not grow faster, if debt does not stabilise, or if government suddenly stopped fiscal consolidation and went on a spending spree.
SA is “likely approaching a turning point after several years of falling growth”, Moody’s says.
With Moody’s out of the way, attention now shifts to Fitch and S&P, who will release their reviews of SA in a few days’ time.
Both agencies have SA’s credit rating at BBB-, one level above the dreaded sub-investment grade. Fitch has a stable outlook on its rating while S&P has a negative outlook.
The major disadvantages of having a rating deteriorate to subinvestment grade is that not only would government’s cost of borrowing rise, but it would take more than five years to get the investment-grade rating back.
SA, whose bonds are included in the World Government Bond Index, needs to have an investment-grade rating by at least two of the three major rating agencies to remain in the index. The advantage of being included in the index is that a country’s bonds find more exposure to global investors and therefore a greater chance of attracting investment.
“I feel that S&P will be less lenient and will most likely downgrade to BB+, but probably in December 2016, particularly if we experience some shocks to production,” says Nedbank economist Isaac Matshego. “I am particularly concerned about the risk of prolonged labour strikes later this year, as wage talks in platinum mining and some manufacturing industries are likely to hit a deadlock.”
Wage negotiations in manufacturing and platinum mining are expected to start in the second half of the year.
SA’s economic challenges, more importantly the threats of downgrades to sub-investment grade, have brought government, business and labour closer together in a cooperation drive.
In a feedback session in May, the social partners said several achievements had been reached since the beginning of the year. These include a R1bn small and medium enterprises fund committed by the private sector, giving “urgent attention” to the Mineral & Petroleum Resources Development Act, a R70bn capital injection by the Public Investment Corp into various sectors, and a retraction of the regulation on unabridged birth certificates by December this year, among others.
The partnership is being intensified at a time when SA’s economic growth is forecast to be below 1% by many, including the Reserve Bank and national treasury.
These forecasts were recently reinforced by disappointing mining and manufacturing data. Mining production fell 18% year on year in March following an 8.3% decline in February. Manufacturing production fell by 2% year on year in March after a 2.2% increase in February.
The two sectors will continue to feel the effects of slowing Chinese demand and lower global commodity prices.
This is why economists, and probably policy makers too, are hoping for a quick resolution to wage negotiations this year before they lead to strikes.
Strikes would weigh on output
(already under pressure), push the economy to the brink of a recession and risk more job losses.
Manufacturing shed 100,000 jobs, down to 1.6m workers, while mining lost 10,000 jobs to 473,000 in the first quarter, according to Statistics SA’s latest quarterly labour force survey.
SA’s unemployment rate is at its highest in almost eight years. Statistician-general Pali Lehohla said this indicated the need for a rethink of jobs policies and programmes by policy makers. The country has several, including the Jobs Fund, expanded public works programme and the employment tax incentive scheme. But these have not made a dent on unemployment.
The number of new entrants to the labour market is also increasing and the low economic growth means they will join the 5.7m people who are struggling to find employment.
The rand’s volatility is another concern. Importers find it harder to plan in an environment of currency volatility while the Reserve Bank’s inflation outlook also becomes harder to estimate.
The weak rand is fuelling the gradual rise in food prices, which are picking up after a severe drought caused production shortages. Consumers will, over the next few months, have to prepare for several price increases that will erode the buying power of their disposable incomes. Municipalities will raise the tariffs of electricity, water and other services, interest rates will rise again and food prices will also go up.
This, and the fact that most SA households spend large parts of their disposable incomes on servicing debt, is one of the reasons growth in spending by households is expected to slow even further this year, against last year’s 1.6%. This will take away from economic growth.
Though the rand recently found support in line with other emerging markets when the dollar weakened, market jitters ahead of the ratings decision in a few days’ time and poor incoming economic data are some of the factors that will keep it under pressure.
The real test for the local economy will come in the second half of the year when wage negotiations in the platinum and manufacturing sectors get under way
SA cannot forget the costly and protracted manufacturing and platinum mining strikes that debilitated production and crippled economic growth in 2014. While the risk of strikes remains, says Old Mutual Investment Group chief economist Rian le Roux, employers and employees alike may have learnt from past experience and will potentially avoid any decisions that will stall the already lacklustre economic growth.
“I’m hoping that we get through the second half of the year without a lot of disruption and if that happens, it will make a big contribution to confidence,” Le Roux says.
The National Economic Development & Labour Council (Nedlac) is finalising a framework to reduce economic disruption from protracted strikes, according to a statement issued jointly by business, labour and government.
Not everything is doom and gloom. SA’s Barclays manufacturing purchasing managers’ index has been rising — indicating an improvement in manufacturing activity. But these small improvements have so far not translated into actual increases in manufacturing production.
There has also been an increase in exports. The trade balance switched from a R1.3bn deficit in February to a R2.9bn surplus in March as exports overtook imports.
Though it is too early to determine whether this is the beginning of an upward trend or not, the surplus has been welcomed. It could have been supported by the fact that economic growth in one of SA’s main export markets for manufactured goods — the eurozone — picked up in the first quarter.
Growth in demand for imports could also have slowed as these are more expensive due to the weak rand.
SA will have to implement the strategies that government, labour and business have come up with, especially with reports that SA is now the third-biggest economy on the continent, after being overtaken by Egypt (Nigeria tops the list).
The country cannot forget the costly and protracted manufacturing and platinum mining strikes in 2014