SA slides to junk status

Fitch gives country a big negative

POLITICAL risk relating to the ANC’s succession struggle has become the top concern for ratings agency Fitch, which yesterday revised its outlook for the country from stable to negative, while keeping it one notch above the dreaded junk status.

It said political risks to standards of governance and policy-making had increased and “will remain high at least until the electoral conference of the ANC”. This would hurt macroeconomic performance.

It said infighting in government and the ANC – for which Finance Minister Pravin Gordhan has become a lightning rod – would continue, distracting policymakers and leading to “mixed messages that will continue to undermine the investment climate, thereby constraining GDP growth”.

Fitch said former public protector Thuli Madonsela’s report on state capture had highlighted “allegations of influence peddling and improper procurement practices involving close allies of the president”.

The report also underlined the risks to governance at state-owned enterprises, noting the resignation of Eskom chief executive, Brian Molefe.

It said debt of SOEs remained an important contingent liability to the state, amounting to R743bn (18.2 percent of GDP) at the end of March, of which R280bn was subject to government guarantees.

Factional battles in the ANC could undermine government efforts to improve the governance of these enterprises, Fitch said, referring to undertakings by Gordhan and Zuma at the beginning of the year that this would be addressed as a matter of urgency.

The cabinet has approved draft legislation to tighten processes for the appointment, removal and remuneration of executives and boards of public enterprises and to regulate private sector participation, but the arm wrestle over the SAA board, which culminated in the return of Dudu Myeni as the chair, against the wishes of Gordhan, has shown the process remains fraught.

Molefe’s resignation from Eskom following revelations in Madonsela’s report of his close relationship with the Guptas, as well as evidence of links between the family and the majority of board members, has raised uncertainty over the future of the parastatal.

In a separate development, Standard and Poor’s cut Eskom’s longterm corporate credit rating to BB from BB+, with a negative outlook.

On a positive note, Fitch said the release this week of the draft Integrated Resource Plan, in which nuclear procurement appears to have been deferred by at least 10 years, would ease concerns about any medium-term fiscal impact.

It said while the economy had begun to recover from “a series of shocks”, business confidence was still depressed and investment continued to contract.

It projected 1.3 percent GDP growth next year and 2.1 percent in 2018, saying Gordhan’s fiscal targets in his October mediumterm budget policy statement now looked “only mildly optimistic”.

It saw the budget deficit shrinking to 2.8 percent of GDP in 2018/19, just 0.1 percent higher than Gordhan’s target.

While total general government debt would rise to 55 percent by March 2019 from 51.5 percent this year, it was “highly favourable” that 90.7 percent of it was denominated in local currency, with an average maturity of 14.6 years.

The #FeesMustFall protests had shown how social pressures could lead to further spending pressures, but the fact expenditure ceilings had not been breached since they were introduced in 2012 suggested such pressures had been well managed.

The Treasury said the fact that the country’s investment grade status had been maintained “demonstrates the resilience of the country and its people… to achieve a common mission”.

South Africans were thanked for their efforts in ensuring the country did not lose its investment grade status..”

Standard and Poor’s is to announce its decision next week.