CONCERNS OVER RATINGS, AND POLITICAL RISK
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