How political is Fitch’s ‘risk’ caveat?

Digging deeper into ratings deliberations can turn up some disquieting questions

HAD it not been for the very disappointing news that our economy contracted by 1.2% in the first quarter of this year, South Africans would have had good reason to pop a few bottles of champagne this week.

The smallest of the big three credit-rating agencies, Fitch, affirmed South Africa’s long-term foreign currency issuer default ratings at BBB-.

“The BBB- rating reflects lowtrend GDP growth, significant fiscal and external deficits and high debt levels, which are balanced by strong policy institutions, deep local capital markets and a favourable government debt structure,” Fitch said.

Of course, we must keep in mind that 90% of the debt issued by South Africa is actually in rands, and the rating on local currency issuer default ratings remains three notches above sub-investment grade.

So, in essence, it’s the 10% that’s issued in foreign currency, mainly US dollars, that is one notch below “junk”. A factor that is often taken for granted.

The efforts invested by the government, business and labour, crisscrossing the globe trying to convince investors that South Africa remains a compelling long-term investment destination, prove the extent of the perception and reputational damage that comes from one’s foreign currency sovereign debt rating being labelled “junk”, notwithstanding the 10% factor.

I had an opportunity to talk to the chief economist at Investment Solutions, Lesiba Mothata, after the Fitch announcement and the release of the GDP numbers.

He explained that although South Africa’s management of debt is world class, “the pace at which we have accumulated this stock of debt is seen as too rapid, and the cost of this debt is also very high. This is quite prohibitive if you don’t have growth, and therefore if growth continues to falter as we have seen in the first-quarter 2016 numbers, the risk of further downgrades starts to be a reality.”

South Africa’s debt as a percentage of GDP currently sits at 51%. This number was 27% before the global financial crisis of 2008.

But let’s pause for a minute and give ourselves a pat on the back.

I genuinely wonder if rating agencies don’t take it too far in their analysis of ’political risk’

We did it. All three ratings agencies — S&P Global Ratings, Moody’s and Fitch — have kept our foreign currency debt ratings within investment grade, despite the plethora of factors counting against us in the short term.

As Finance Minister Pravin Gordhan said, “this effectively buys us another six months of breathing space”, as the next cycle of rating reviews is expected in December.

However, there was one key difference between the Fitch rating and those of the other two agencies. Fitch kept South Africa’s outlook as stable, and resisted the temptation of fol- lowing suit and downgrading us to a negative outlook.

However, Fitch did not miss the opportunity to opine on what it called political risk, by re-visiting the disaster of 9/12, noting President Jacob Zuma’s Nkandla woes and even pronouncing on the ANC’s chances at the polls come August 3.

Zuma has “become increasingly embattled following the Constitutional Court ruling that he should repay some public funds used to refurbish his Nkandla residence and the Gauteng high court’s ruling that the previous suspension of a 2009 corruption case against Zuma was irrational,” said the ratings agency. “Nevertheless, institutions have proved robust.

“However, Fitch expects the governing ANC may lose some support in local elections on August 3 2016. Tensions within the ANC are also increasing ahead of the conference in December 2017 to elect Zuma’s successor as ANC president.”

Fitch claimed that it “views political risks mainly in terms of the impact on the economy and public finances”.

As I cue the shrewd Gwede Mantashe to dismiss Fitch’s analysis as nefarious Americans pursuing their regime-changing tactics, I genuinely wonder if rating agencies don’t take it too far in their analysis of “political risk”.

Let me open another bottle of champagne.

Khumalo is chief investment officer of MSG Afrika Group and presents “Power Business” on Power 98.7 at 5pm, Mondays to Thursdays Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.sundaytimes.co.za