Fitch gives SA benefit of the doubt
Reprieve for economy comes with warning that SOEs are ailing
● South Africa won another reprieve on Friday as Fitch Ratings opted to keep the country’s credit rating unchanged. But it warned of the challenges ahead.
Fitch said in a statement that “South Africa’s ratings are weighed down by lowtrend growth, sizable government debt and contingent liabilities, and the highest inequality in the world, which raises policy risks”, but it added that this was balanced by a “favourable government debt structure, deep local capital markets, a healthy banking sector and strong institutions”.
Fitch highlighted continuing tensions in the ANC as a possible risk, and was sceptical of recent government initiatives, saying they “are unlikely to improve trend growth significantly, as their implementation and timeline is uncertain and their impact on growth ambiguous”.
This includes the much-vaunted plan to attract $100-billion of new investments over the next five years, a national minimum wage and some measures to contain the risk of strikes.
However, Fitch expressed confidence that land reform, including expropriation without compensation, “will likely be handled so as to avoid significant economic damage”, although the policy will focus investors’ minds on the more general risks to property rights resulting from high inequality.
National Treasury said in a statement that the “government fully recognises Fitch’s assessment of challenges and opportunities the country faces in the immediate to long term”.
It added that “tangible progress” had been achieved on most of the confidence-boosting measures that were presented last year, while “recent changes in governance critical SOEs and the 2018 Budget, which outlined decisive and specific policy measures to strengthen the fiscal framework, are expected to improve the investment climate of South Africa”.
Last year Fitch and S&P Global Ratings were the first of the three major international ratings agencies to downgrade South Africa to sub-investment grade or junk status. The ongoing risk is that they could downgrade the government further, leading to higher borrowing costs.
Only Moody’s has retained South Africa’s investment-grade rating. In March it revised the outlook on the country’s credit rating to
If you really want to fix things in South Africa you are going to have to make some sort of enemies
Nicky Weimar
Senior economist at Nedbank
stable from negative. It is scheduled to update the rating on October 12.
A negative rating would push South Africa into full junk status, and see the country kicked off a major global government bond index, leading to capital outflows of more than R100-billion as some investors in this index are not mandated to hold junk debt and would have to sell.
Reforms to reduce the fiscus’s contingent liabilities, which are due to its financial support for state-owned entities, are essential. Eskom currently poses the largest risk, with more than R300-billion in state guarantees.
Fitch said: “The affirmation and stable outlook takes into consideration signs of recovering governance standards and the prospect of a mild cyclical recovery but also indications that financial challenges at key state-owned enterprises remain substantial and the fact that government debt has yet to stabilise.”
Fitch cautioned that high debt and the poor performance of SOEs remained a risk, and far-reaching restructuring measures could be politically difficult to implement.
“While the authorities state further cash injections will not be needed, Fitch assumes some financial support from the government will be required.”
The government has already acknowledged that SAA will require further state support.
Moody’s said in March it could downgrade the country’s rating or change the outlook to negative if the state’s “commitment to, or capacity to engineer revived growth and debt stabilisation, were to falter”.
But changes are already afoot.
Xhanti Payi, economist and director at Nascence Advisory and Research, said: “We’ve seen the pushback from the government in terms of the public-sector wages, which is a big part of the budget.”
Payi said governance challenges at SOEs such as Eskom and SAA had been swiftly addressed with a change in management, while at SARS an inquiry into tax administration and governance was under way.
The VAT hike to 15% from 14% in April, regarded as an unpopular political move, showed that government was serious about supplementing and balancing its finances, he said.
The government was also engaging investors abroad and in the domestic private sector. Although economic growth had contracted by 2.2% in the first quarter of this year, it was historic, he said. “We still have to see the full effect of Ramaphoria, if it has done anything in the second quarter. We won’t know until maybe August when we get those numbers.”
Fitch said despite a sharp contraction in economic growth in the first quarter, growth would recover to 1.7% in 2018 and 2.4% in 2019, from 1.3% in 2017. “This will reflect relatively steady private consumption growth combined with strengthening gross fixed investment.”
A downgrade from Fitch would have come at the worst time.
Nicky Weimar, senior economist at Nedbank, said the state had made strides by choosing to cut the wage bill but the state was politically constrained and unable to move as fast as it would like to. There was a sense that the balance of power within the ANC was still very fragile.
“If you really want to fix things in South Africa you are going to have to make some sort of enemies. The unions are going to be first in line. I don’t know how you do that in the year before elections,” Weimar said.