CON­CERNS OVER RAT­INGS, AND PO­LIT­I­CAL RISK

Financial Mail - Investors Monthly - - Opening Bell -

alk of a pos­si­ble sov­er­eign credit rat­ing down­grade has dom­i­nated eco­nomic con­ver­sa­tion for most of this year and the dis­cus­sion is likely to be height­ened in the build-up to the end of the year.

S&P Global Rat­ings will deliver its rat­ings ac­tion on De­cem­ber 2.

Con­sid­ered to be the harsh­est of the three ma­jor credit rat­ings agen­cies, which in­clude Fitch Rat­ings and Moody's In­vestor Ser­vice, S&P sur­prised the mar­ket when it af­firmed its cur­rent rat­ing of the sov­er­eign (BBB- with a neg­a­tive out­look) at the half-year re­view in June, rather than low­er­ing the rat­ing, which is pegged one notch above spec­u­la­tive or “junk” grade.

Through­out this year busi­ness, labour and govern­ment have united to pull to­gether a pack­age of ini­tia­tives that would sta­bilise the labour en­vi­ron­ment, cut high youth unemployment, sup­port small busi­nesses and, over time, ig­nite eco­nomic growth.

Amid in­creas­ing po­lit­i­cal risk in re­cent months and per­sis­tently anaemic growth, econ­o­mists and busi­ness lead­ers have ques­tioned whether SA can again pull off another feat to con­vince rat­ings agen­cies chomp­ing at the bit to re­frain from tough ac­tion.

In Novem­ber Bar­clays Africa CEO Maria Ramos told a gath­er­ing of Por­tuguese busi­ness­men in Jo­han­nes­burg that de­spite ev­i­dence point­ing to a down­grade she ex­pected rat­ings agen­cies to keep the coun­try on watch un­til the next re­view in six months’ time.

El­ize Kruger, econ­o­mist at Kadd Cap­i­tal, told IM: “I think the jury is still out, and the like­li­hood is prob­a­bly 50/50 for a po­ten­tial down­grade.”

Kruger said the rand

Tweak­ness that could ac­com­pany a down­grade to non­in­vest­ment grade held ad­verse im­pli­ca­tions for markets. “Thin vol­umes in De­cem­ber, given that it is the holiday month, could ex­ac­er­bate the im­pact.”

S&P wants to see firmer ac­tion from govern­ment on eco­nomic re­forms, and a progress re­port on im­prove­ments on the medium-term eco­nomic growth out­look and in busi­ness con­fi­dence.

The latest avail­able SA Cham­ber of Com­merce busi­ness con­fi­dence in­dex re­port showed busi­ness con­fi­dence had made only a modest re­cov­ery in Oc­to­ber fol­low­ing im­proved ex­ports, but that it had slipped year on year.

Gard­ner Rusike, as­so­ciate di­rec­tor at S&P, told del­e­gates at an S&P in­sur­ance con­fer­ence re­cently that strug­gling state-owned en­ti­ties, in­clud­ing San­ral and SAA, re­mained risks to govern­ment fi­nances and the debt bur­den. Po­lit­i­cal in­fight­ing could also un­der­mine the state’s com­mit­ment to in­sti­tut­ing the most ap­pro­pri­ate pol­icy choices.

Rusike said: “What we are look­ing for is to see poli­cies that are sup­port­ive of turn­ing around the eco­nomic tra­jec­tory and pro­vid­ing growth in the medium term, as well as a faster fis­cal consolidation path in line with what was out­lined [dur­ing the fi­nance min­is­ter’s bud­get speech] in Fe­bru­ary.”

At the time of writ­ing Fitch Rat­ings had not yet con­firmed the date on which it would issue a re­port, but its rat­ings ac­tion is ex­pected to fol­low soon after the re­lease of the S&P Global Rat­ings re­view. Moody’s Is­suer Ser­vices, which re­cently in­di­cated a less than 50% chance of down­grad­ing the sov­er­eign rat­ing, was to pub­lish its rat­ing ac­tion on Novem­ber 25.

Po­lit­i­cal risk has been a key theme in­flu­enc­ing global markets in 2016 with the exit of Bri­tain from the EU and the un­cer­tainty ac­com­pa­ny­ing Don­ald Trump’s rise to the pres­i­dency in the US.

The Ital­ian ref­er­en­dum on De­cem­ber 4 may in­crease volatil­ity in world markets. Ital­ians will vote on a se­ries of changes to the coun­try’s in­sti­tu­tional frame­work.

The next most im­por­tant event on the eco­nomic cal­en­dar will be the US Fed­eral open mar­ket com­mit­tee meet­ing in mid-De­cem­ber and sub­se­quent an­nounce­ment on in­ter­est rates on the 14th. Fed chair Janet Yellen has pre­vi­ously in­di­cated that a rate hike of 25 ba­sis points could be an­nounced be­fore the end of 2016.

Tu­misho Grater, eco­nomic strate­gist at fi­nan­cial ser­vices group No­vare, says the Trump win has in­jected un­cer­tainty and volatil­ity into the fi­nan­cial markets, and this may give the Fed cause to keep rates un­changed.

“Given the neg­a­tive re­ac­tion, it’s pos­si­ble that a grow­ing be­lief that Fed pol­icy will stay looser for

Se­vere drought con­di­tions and ex­change rate pass-through from the de­pre­ci­a­tion of the rand have led to marked ac­cel­er­a­tion in head­line in­fla­tion

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.