SA takes first step back up credit ratings ladder

● If this week’s budget marks the bottom of the slide in the country’s fiscal position, the best case scenario for a return to investment grade by the world’s three leading ratings agencies — Moody’s, Fitch and S&P — is a path that could take as long as three years, according to economists.

South Korea was among the fastest to escape from junk status, taking 12 months to get back to investment grade after the emerging-market crisis in the late ’90s. Romania, on the other hand, took six years to return to investment grade after the 2008 global financial crisis.

The removal of Nhlanhla Nene as finance minster in December 2015 nudged South Africa towards junk territory. Moody’s downgraded South Africa’s foreign currency debt to junk but kept local currency debt at investment grade, which saved the country being kicked off major bond indices.

Konrad Reuss, S&P Global Ratings MD for sub-Saharan Africa and South Africa, said S&P had a stable outlook on the country, and at its last rating, in November, had been expecting “some change” to the political landscape. He said: “The challenges are quite significant in terms of reintegrating growth in the economy, returning to a path for fiscal consolidation.”

Moody’s said President Cyril Ramaphosa and his administration needed time to design and implement measures to improve growth and stabilise public finances.

Moody’s vice-president Zuzana Brixiova said the agency was monitoring developments. “The key point from a credit perspective will be the new leadership’s response to the country’s economic and fiscal challenges, and progress in implementing reforms addressing them.”

Fitch was not available for comment. What ratings agencies wanted to see was not only an improvement in the budget’s arithmetic and mechanics, but at least that the country was on the path to growth, said Nedbank chief economist Dennis Dykes.

Despite an improving global growth outlook, the Reserve Bank expects the South African economy to expand only 1.4% this year and 1.9% in 2019. The World Bank expects 1.1% this year and 1.7% next year.

The rand is among the strongest-performing emerging-market currencies this year, and improving business and consumer confidence has improved growth prospects.

If the economy “is growing at 3% or 3.5% it’s a very different fiscal picture to it growing at 1%, so if you can demonstrate you are going to take these measures to get to that growth rate, the whole picture changes”, said Dykes. He expected ratings agencies to give the country some space to steady the ship.

Dykes said an upgrade in South Africa’s sovereign ratings would require time and the right moves by the government.

Standard Bank chief economist Goolam Ballim said the government could shake up the broader economic cluster.

“So between the [Department of Trade and Industry], Department of Economic Development and even the ministry of small business, a greater level of cohesiveness and linkage to the National Treasury needs to reforged.”