Junk status rating not expected from S&P

RATINGS agency Fitch’s decision last week to affirm SA’s sovereign credit rating at BBB with a negative outlook was widely anticipated and, with that out of the way, attention moves to Standard & Poor’s (S&P) rating review due on Friday.

S&P is also likely to affirm its rating, that at BBB- is just one level above the speculative grade or junk status from which investors shy away. What is encouraging is S&P’s assignment of a stable outlook on its rating, which has created the expectation that another downgrade is not imminent.

When agencies affirm ratings, they are giving SA more time to address its challenges. While it may take time to address all SA’s economic challenges, at least some efforts are being made. For instance, a strike in public service has been averted, taxes have been raised giving government more revenue while growth in government spending was moderated to reduce large budget deficits, and 900MW was added to the electricity grid when Unit 1 of the Koeberg power station was returned back to service after a three-month refuelling and maintenance programme.

It is now up to workers in the gold and coal sectors to decide how SA’s economy will perform. If their wage negotiations fail to be resolved timeously and escalate to strikes, then economic growth in the third quarter of the year could underperform.

The production side of the economy — mining and manufacturing — is already underperforming due to lacklustre demand, rising input costs and weak commodity prices. This will be reflected in Statistics SA’s mining and manufacturing production data on Thursday.

Mining production rose 18.8% in March compared with March last year, supported by low base effects created when platinum miners embarked on a strike.

Mining production numbers for the better part of this year will mainly be supported by those low base effects and not necessarily by significant increases in production. Nonetheless, higher mining output will support economic growth.

Manufacturing production increased by 3.8% year on year in March, but load shedding during April suggests that the pace of growth could have slowed.

An index that measures activity in the manufacturing sector, the Kagiso purchasing managers’ index, remained well below 50 points in April — supporting a view that manufacturing output was subdued that month.

The Bureau for Economic Research will release the Rand Merchant Bank-sponsored business confidence index for the second quarter tomorrow.

Load shedding was still occurring in April and last month, fuel and electricity prices rose sharply, while demand remained lacklustre — factors that could have negatively affected confidence levels. The fact that electricity prices are expected to rise again next month after increasing in April will not do much to boost confidence.

These factors suggest that there was little to be confident about — except perhaps that interest rates remained unchanged in May — and could suggest that business confidence failed to improve over the quarter. The index fell two points to 49 in the first quarter.