SA growth rise does little to calm fears
IMPROVING growth is doing little to ease market concern that South Africa’s economic prospects are dimming.
Investors are paying 84 basis points more to insure the country’s debt against non-payment for five years using credit default swaps than for similarly rated Mexico, according to data.
The South African contracts are among the most expensive in the world, the figures show.
While a report on Tuesday showed gross domestic product (GDP) growth accelerated in the third quarter, and last year’s output was revised higher by 4.4 percent, headwinds including electricity shortages signal there was little momentum in the economy, Razia Khan at Standard Chartered said.
Moody’s Investors Service downgraded South Africa’s credit rating this month on concern about growth and debt.
“With downside risks to growth”, the revision to last year’s GDP will not make much difference, Khan, the head of Africa macroeconomic research at the London-based bank, said on Tuesday. “For ratings agencies, we believe South Africa’s weak growth profile is likely to be the bigger issue.”
The adjustment will affect the government’s gross debt ratio, making it more likely Finance Minister Nhlanhla Nene will keep a pledge to maintain the proportion below 50 percent of GDP. Gross government debt was projected to climb to 49.8 percent of GDP in the year to March 2018, according to forecasts in the medium-term budget released last month.
“If nominal GDP is expanding, then your debt ratios shrink,” Nicky Weimar, an economist at Nedbank Group, said on Tuesday.
Standard & Poor’s and Fitch Ratings will give sovereign rating updates on December 12.
While a separate report on Tuesday showed business confidence rallied in the fourth quarter to the highest level since March 2013, the GDP revision may not be enough to make the country more attractive for investment amid managed blackouts by Eskom.
“The economy is a bit bigger but I don’t know if it’s big enough to attract business,” Francois Stofberg at Efficient Group said on Tuesday. “Growth is not a very good show-off compared to other countries, so this won’t create a significant boost in investor sentiment.”
“The rebasing of the GDP is not material enough to alter the assessment that investors are going to make,” Peter Worthington at Barclays’ Johannesburgbased investment banking unit, said. “The concerns are broader.”
LAST week, executives from Moody’s rating agency visited South Africa. They were invited to address the portfolio committee on economic development to explain how they arrive at a particular rating and future outlook. Before the meeting, I was able to meet with one of the members of the delegation for a frank discussion on the political context.
Rating agencies matter, mostly because they provide a powerful signal to investors on the state of a particular economy, which in turn influences the price of credit. Our economy will not survive a rapid escalation in debt-servicing costs, which will severely hinder government expenditure on service delivery.
Although the deficit is projected to narrow in the outer years (2017/18) on the back of increasing gross domestic product (GDP) growth, the debt-to-GDP ratio continues to climb, which only points to an increase in the price of our debt.
It all boils down to confidence. Although it cannot be touched and felt, sentiment matters. Economies work because participants believe that their effort will be rewarded. Rating agencies feed sentiment. Therefore before a decision is taken to invest, a thorough and multi-faceted analysis of the chosen economy is conducted, and extensive consideration is given to many variables. These factors include, among others, economic growth rate, the cost of labour and general stability.
The medium-term budget policy statement (MTBPS) delivered by Finance Minister Nhlanhla Nene must be viewed against this backdrop.
It was the first major opportunity for him to assert himself, to establish credibility, and introduce fresh, bold and innovative measures to address an economic crisis that is fast gathering momentum.
The minister needed to say that bloated government – the cabinet, public entities and agencies – would be shaved and that out of control executive pay to ineffective and unproductive cadres would be shut down. He needed to say that the endless supply of money to failing state-owned enterprises would be replaced by private sector investment, and that those responsible for fruitless and wasteful expenditure would face real consequences. And that he would need to do it. Quickly.
The minister also needed to set out clear and immediate action on kick-starting economic growth. The only way to do this is through an adrenaline shot to entrepreneurs and small business. It is possible to get the red-tape nightmare out of the way, slash tax on start-ups and inject some
Finance Minister Nhlanhla Nene resorted to an act of plagiarism, rehashing stale ideas with well-worn rhetoric that has been unsuccessful.
excitement into the prospects of doing business in South Africa. Sadly, his MTBPS was dismal. In the shortest statement in the seven years I’ve been in Parliament, the minister admitted South Africa is indeed at a crossroads regarding the economy, and then didn’t offer a different direction.
There was no vision, only a strong indication that we are to remain on the current path, which has already led us to this dire situation.
While Nene stood at the podium with the authority of an author, with the ability to forge a new course for the country’s economic narrative, he instead resorted to an act of plagiarism, rehashing stale ideas with well-worn rhetoric that has been unsuccessful.
A week later he confirmed that he will not, or cannot, do what he says he will do. When the Development Bank of Southern Africa Amendment Bill was debated in Parliament, he said nothing new on changing the financial model for state-owned enterprises – as he had promised to do only one week before.
After his MTBPS, it is clear that more of the same is to come – more disinvestment, more corruption, more wasteful expenditure in the public sector, and more unacceptably high levels of unemployment.
This was so clearly illustrated on November 6, when Moody’s downgraded South Africa’s investment grade credit rat- ings to Baa2 from Baa1, a mere 16 days after Nene’s MTBPS. At the briefing to Parliament, Moody’s said they would closely watch the minister’s conduct post the MTBPS, and therefore it is obvious that nothing he said or did invoked confidence.
The downgrade is a significant rejection of Nene’s MTBPS, tangibly illustrating the total lack of investor confidence in South Africa’s economic outlook.
In their statement, Moody’s stated that the primary driver for the downgrade of South Africa’s long-term debt rating is the weak outlook for real growth over the coming years. What Moody’s is clearly alluding to is that the economic growth problems are not merely cosmetic, a few tweaks and minor edits are not all that is required.
Rather, the issue is the entire structural and ideological framework itself, which results in a weak economic growth. Positioning the state at the centre of our economy cannot and does not work, and the latest Moody’s downgrade acts as the envoy for this message.
Tumultuous events in Parliament show that the pressure cooker is ready to blow. The steady erosion of confidence in our political institutions and economic mismanagement are a toxic mix. Fitch Ratings is now also expected to downgrade South Africa’s rating next month.
How much further does the South African economy have to sink before the government wakes up to the fact that its central economic thesis is unworkable?