Kon­rad Reuss

S&P Global Rat­ings MD for sub-Sa­ha­ran Africa and SA

Financial Mail - Investors Monthly - - Budget 2017 -

Your ini­tial re­ac­tion to this bud­get?

From a rat­ing agen­cies’ per­spec­tive, given that the fis­cal tar­gets and eco­nomic growth as­sump­tions in the bud­get are very much aligned with our ex­pec­ta­tions, I would call this a very re­as­sur­ing bud­get. Also, this bud­get has shown a con­tin­ued firm com­mit­ment to a path of fis­cal con­sol­i­da­tion, which is im­por­tant to us.

Is there any­thing in the bud­get to give you con­fi­dence that SA may be able to raise its growth rate this year be­yond the 1.4% which S&P has pen­cilled in?

It would be wrong to ex­pect the bud­get alone to be a game-changer with re­gards to eco­nomic growth. The mod­er­ate re­cov­ery we’ve seen this year is very much a cycli­cal re­bound af­ter what hap­pened last year. It’s helped by firm­ing com­mod­ity prices, the breaking of the drought, and the pickup in global de­mand. So over­all there’s been a more pos­i­tive ex­ter­nal en­vi­ron­ment.

But the main point is that it’s very much a cycli­cal re­cov­ery — not the sus­tained, higher level of growth which is so im­por­tant with re­spect to the long term. That is some­thing this bud­get is short on. It men­tions struc­tural re­form, but only the im­ple­men­ta­tion of re­form — be it in paras­tatals, or min­ing, or the labour mar­ket — can have a pos­i­tive im­pact on sen­ti­ment and drive higher growth . . . We have ex­pressed dis­com­fort at the slow pace of struc­tural re­form. It would need to pick up [for us] to see sus­tain­able faster growth.

How high is the bar to fur­ther down­grades from S&P?

With the con­tin­ued neg­a­tive out­look, we’re say­ing the risks are on the down­side, and there is gen­er­ally greater than a one-out-ofthree chance. Since as­sign­ing the neg­a­tive out­look on the cur­rent BBB- for­eign cur­rency rat­ing, fis­cal fi­nanc­ing needs and eco­nomic growth have not met our base­case ex­pec­ta­tions. How­ever, we af­firmed the rat­ings in De­cem­ber, notwith­stand­ing mar­ginal re­vi­sions to our growth forecast.

Look­ing ahead, if GDP growth or the fis­cal tra­jec­tory does not im­prove in line with our cur­rent ex­pec­ta­tions (say, if SA en­ters a re­ces­sion in 2017) then we could lower the rat­ing. In ad­di­tion, if gov­ern­ment debt lev­els and con­tin­gent li­a­bil­i­ties (re­lated to paras­tatals) ex­ceed our cur­rent ex­pec­ta­tions, rat­ings could be low­ered. A weak­en­ing of SA’s in­sti­tu­tions due to po­lit­i­cal in­ter­fer­ence . . . could also re­sult in lower rat­ings.

In De­cem­ber, you noted that po­lit­i­cal ten­sion in SA was ris­ing, and said this could weigh on in­vestor con­fi­dence and ex­change rates and po­ten­tially af­fect gov­ern­ment pol­icy di­rec­tion. Is this pre­dic­tion be­ing borne out?

In our De­cem­ber af­fir­ma­tion, we as­sumed that po­lit­i­cal ten­sion and con­tes­ta­tion will in­crease in the run-up to the ANC’s 2017 elec­tive con­fer­ence.

At this point, there are no signs that po­lit­i­cal ten­sions are di­min­ish­ing. If (ris­ing) po­lit­i­cal ten­sions were to un­der­mine the eco­nomic growth and fis­cal tra­jec­tory, it would be a con­cern.

If Pravin Gord­han were to be re­moved as fi­nance min­is­ter and re­placed with a less cred­i­ble can­di­date, how would that af­fect SA’s sovereign rat­ing with S&P?

Rat­ings are not a credit opin­ion on spe­cific of­fice hold­ers. A sovereign rat­ing ad­dresses a gov­ern­ment’s will­ing­ness and abil­ity to ser­vice its debt . . . we have seen that po­lit­i­cal events have dis­tracted from growthen­hanc­ing re­forms while eco­nomic growth has re­mained a key rat­ing’s weak­ness. In light of our neg­a­tive out­look, dis­rup­tive events that would im­pact on mar­ket con­fi­dence and in­vest­ment cli­mate, threat­en­ing GDP growth or the fis­cal tra­jec­tory, are a con­cern.

What fac­tors sup­port SA’s rat­ing?

The rat­ing is sup­ported by SA’s sta­tus as a mid­dle-in­come coun­try and its di­ver­si­fied econ­omy as well as our as­sump­tion that SA will ex­pe­ri­ence con­tin­ued broad po­lit­i­cal and in­sti­tu­tional sta­bil­ity as well as macroe­co­nomic con­ti­nu­ity. This also takes into ac­count the strength and trans­parency of SA’s po­lit­i­cal in­sti­tu­tions and deep do­mes­tic fi­nan­cial mar­kets.

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