Ratings jitters subside for now
SA gets a reprieve from agencies but concern remains over policy unpredictability from ANC
SOUTH Africans breathed a sigh of relief on Friday night when the country survived another round of credit rating reviews with no further sovereign ratings downgrades.
Though there was only an outside chance that Fitch and S&P Global Ratings would cut the country’s ratings again, having junked South Africa in April on President Jacob Zuma’s midnight cabinet reshuffle, the ratings remain a constant source of anxiety to South Africans and financial markets.
The only disappointment is that S&P retained its negative outlook on both South Africa’s local and foreign currency ratings, suggesting that it fears the country has further to slide.
But it could have been far worse. The agencies’ decisions to affirm South Africa’s ratings give the Treasury at least another six months to get its house in order and to match its promises of fiscal prudence and confidenceboosting reform with action.
The ratings from S&P are split. South Africa’s local-currency debt is ranked BBB-, on the bottom rung of investment grade, and its foreigncurrency debt is at the top of the junk ladder, at BB+. All South Africa’s ratings with Fitch are BB+.
Though both agencies continue to emphasise South Africa’s long-standing weaknesses — low-trend GDP growth, rising debt, deteriorating governance, and the sizeable contingent liabilities posed by weak state-owned enterprises — a new concern has been raised; that of economic policy unpredictability.
The concern is not that South Africa’s novice Finance Minister Malusi Gigaba is going to run looser fiscal policy — both agencies expect only minor fiscal slippage due to lower growth. Rather, the risk is that growth could suffer if the ANC tacks left towards more populist and interventionist policies. This could be in response either to societal pressure or faction-driven ANC internal politics.
Fitch notes in its statement that tensions within the ANC have undermined policy predictability as it is unclear which factions will prevail on individual policy issues.
It expects party infighting to remain strong ahead of the electoral conference in December 2017, when the ANC will select a new party president. The new party leader is likely to become the country’s president after national elections in 2019 or earlier.
Though leaders have emphasised that the recent rhetoric of “radical economic transformation” has signalled no fundamental change in policy direction and that the government remains focused on the goal of inclusive growth, Fitch is not fully convinced.
S&P is also concerned, noting that inequality, poverty, and high unemployment “have the potential to shift policy towards intervention and income redistribution at the cost of headline GDP growth”.
S&P’s “negative” outlook reflects its view that political risk will remain elevated this year. This could distract from growth-enhancing reform, slow the pace of fiscal consolidation, and weigh on investor and consumer confidence.
Nevertheless, S&P expects South Africa’s real GDP growth to rebound from 0.3% last year to 1% in 2017 and average 1.5% up to 2020, thanks mainly to an improvement in agriculture and higher commodity prices.
This is in line with the prevailing consensus but above the Treasury’s February forecast, which Fitch describes as “optimistic”.
Despite this, both agencies expect Gigaba to deliver on his undertaking to remain within the expenditure ceiling. Fitch, however, feels this will not be enough to prevent budget deficits from remaining sticky at around 3% of GDP.
Though S&P expects Gigaba to get net government debt to stabilise at around 50% of GDP over the medium term, it continues to rate SOEs with weak balance sheets as the biggest risk to the debt outlook.
And it doesn’t believe that reforms to this sector will be implemented any time soon.
It singles out Eskom, noting that “plans to improve Eskom’s underlying financial position may not be implemented in a comprehensive and timely manner as it is still addressing its governance issues”. Eskom still has to complete its board appointments and appoint a permanent CEO.
Fitch reveals the shocking statistic that not only do the government’s guarantees to SOEs, independent power producer contracts and public-private partnerships amount to 10% of GDP, but SOEs’ non-guaranteed debt constitutes another 10.5% of GDP, taking the total to almost R1-trillion.
“Given the weak state of SOE finances, the problems in SOE governance and the importance of SOEs for the country’s economy and politics, the risk that some of this debt will land on the [country’s] balance sheet is substantial,” it concludes.
S&P says it would consider lowering South Africa’s ratings if its fiscal and macroeconomic performance deteriorates substantially from its baseline forecasts.
For Fitch, a marked increase in the debt-to-GDP ratio or in contingent liabilities, steeply rising net external debt, and a further deterioration in trend GDP growth could individually or collectively result in a negative rating action.
The Treasury responded by saying that its key focus was to “safeguard confidence and reclaim the investment-grade ratings” and that for this to occur, sustainable fiscal policy and efforts to tackle the sources of low growth would be critical. It also confirmed that the rhetoric of “radical economic transformation” did not imply a fundamental policy shift.
Fitch is not fully convinced the recent rhetoric of transformation has signalled no change