Four-notch jump needed

SA will face an uphill battle for reinclusion in Citi’s World Government Bond Index (WGBI), should the two remaining ratings agencies cut the local currency rating to junk.

SA’s local debt rating, currently teetering on the edge of subinvestment grade by Standard and Poor’s (S&P) and Moody’s, would require a four-notch upgrade for reinclusion in the key index, said Gina Schoeman, a South African economist at Citi.

The WGBI is widely used as a benchmark by funds. Exiting the index is likely to cost the country between R80 billion to R100 billion in capital outflows.

An exit would be triggered by subinvestment grade ratings which, against a backdrop of stagnant economic growth and the prospect of further political uncertainty, looms large.

The economy has slipped into a recession and economists don’t expect a significant uptick in growth from the 0.3% recorded in 2016. Now, global bank Citi has revised its growth forecast down from 0.5% to 0.4% for 2017 due to a sharp negative turn in first quarter growth in the tertiary sector, comprising retail and financial services. It also foresees growth of 0.9% in 2018 and 1.3% in 2019.

But there are downside risks due to the ANC policy conference in December. “Yes, who is elected will make a huge difference to South Africa’s outlook,” Schoeman said.

“However, the two years leading to the national election is going to be a distraction to implementing policy reform and better growth in South Africa. No matter who is elected, the ANC is going to be desperate to remain in power. And that can also come with more radical populist policy-making.”

Fears of populist policies have spooked financial markets.

The announcement of the now suspended revised Mining Charter saw mining shares fall to their lowest levels in a year.

At the same time, Public Protector Busisiwe Mkhwebane’s prescription that the South African Reserve Bank’s mandate be changed to promote economic growth rather than targeting inflation and ensuring currency stability, triggered a selloff in the rand. She’s since backed down from her challenge to the bank’s mandate.

Provided there are no major shocks, ratings agencies are expected to wait out the ruling party’s December policy conference before announcing significant changes, said Schoeman.

“There will be less uncertainty about the economy in 2018.”