TOO SOON TO CELEBRATE MOODY’S DE­CI­SION

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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

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