Doubts persist despite SA’s ratings reprieve

LAST Friday, S&P Global Ratings kept its foreign currency rating for South Africa unchanged at BBB-, but reaffirmed the negative outlook. This week, Fitch also kept its rating unchanged at BBB- and maintained its stable outlook.

Moody’s attaches a sovereign foreign currency rating for South Africa of Baa2 — one notch above the other two rating agencies.

The reaffirmation of South Africa’s investment grade credit rating is due largely to an improving relationship between the government, private sector and labour, an improving fiscal consolidation path, the strength of domestic institutions and a reduction in electricity constraints.

S&P also noted the country’s strong democracy and independent media, as well as the institutional strength of the public protector and judiciary.

The country’s floating exchange rate, inflation-targeting regime and the operational independence of the Reserve Bank were applauded as well.

S&P highlighted the resolve of the National Treasury to reduce the budget deficit through expenditure and revenue measures outlined in the budget as well as tax revenues outperforming collection targets for the past two fiscal years.

S&P revised its economic growth forecast for South Africa downward to 0.6% year on year for 2016. It expects an improvement to 1.5% next year. This is considered too weak to address the high unemployment rate and reduce income inequality.

S&P noted that population growth currently exceeds economic growth. As a result growth in GDP per capita is declining. This means average wealth levels are declining.

Another potential consequence of low GDP growth is further deterioration of government debt relative to national income.

However, the reaffirmation of South Africa’s investment-grade rating is a temporary reprieve dependent on structural reforms.

All three agencies said exceptionally weak growth was their main concern. The lower-thanexpected growth outcome delivered in the first quarter potentially exacerbates this concern.

The uncertainty stemming from domestic politics and how that could impair the institutional strength of the judiciary and the public protector — and the effect this would have on business confidence and investment — was a major concern, as was the risk posed to government debt levels by guarantees to stateowned enterprises.

The tight fiscal conditions under which the Treasury is operating do not allow for further fiscal slippage, including from contingent liabilities.

We still expect a sovereign rating downgrade over the next 12 to 18 months, most likely by S&P and potentially Fitch.

Guidance from S&P suggests that a country can stay on negative watch for 24 months. S&P has had us on negative watch for six months.

In our view, a subinvestmentgrade rating on foreign currency debt is unlikely due to the government’s belt-tightening effort, which is considered by us and the rating agencies to be on a path that will deliver the planned reduction in the budget deficit and stabilisation of government debt.

We are less convinced that there will be meaningful implementation of the structural reforms that will boost business confidence, fixed investment and the growth trajectory.

Labour market reforms, a lack of policy clarity, the mining sector’s empowerment impasse and intensifying political tensions all hold the potential to curb growth prospects by further eroding business and investor confidence.

Our scepticism stems from the fact that growth-enhancing structural reforms have been a priority of the government’s major economic policy strategies, but implementation over the past decade has been lacking.

Positive developments on these variables would not only significantly reduce the odds of further downgrades but, more importantly, would improve South Africa’s economic growth prospects.

Nxedlana is FNB’s chief economist