Fitch’s rating a call to action

Weak growth outlook the major negative

OF SA’s three sovereign credit ratings, the Standard & Poor’s (S&P) is the worst, but the Fitch rating was the one considered to be most immediately at risk. That makes Friday night’s decision by Fitch to affirm its current rating a relief. But far from being a cause for complacency, it needs to be seen as a call to urgent action.

The S&P rating is the one that is on the cusp after it downgraded SA to just one notch above subinvestment grade — “junk” status — last year. A further downgrade would be disastrous for SA, and no one should underestimate how deep the effect could be, on the cost and availability of the foreign money SA and its companies need, on the rand exchange rate, and on the whole financial sector, not to mention investor perceptions of SA more broadly.

But S&P has us on stable outlook, and though it is due to release an update this Friday, it has made it clear recently that it has no plans for a further downgrade — assuming the outlook for the next couple of years doesn’t get any worse.

Moody’s too has recently indicated it is comfortable with its rating, which in any event is two notches into the investment grade band, so a Moody’s downgrade wouldn’t (yet) push SA off the ratings cliff.

The same goes for Fitch — except that Fitch has SA on negative watch, which is why its scheduled update on Friday was so closely watched.

In the event, Fitch opted to hold, but the messages embedded in its ratings decision should be carefully read and digested.

It is worth noting that while Fitch held on SA’s sovereign rating, Moody’s on Friday downgraded Transnet’s rating — so there are some signals for policy makers there too, with SA’s weak economic growth outlook the major negative.

And Fitch is relatively optimistic, with a growth forecast of 2.1% this year; Moody’s and several economists see growth of lower than 2%.

The Treasury responded to the Fitch decision swiftly with an assurance that “the issues raised by Fitch are getting the government’s attention at the highest level”.

That is welcome, as is the Treasury’s assurance that the government will stick “broadly” to its expenditure ceiling as well as take action to address the energy crisis, implement the reforms suggested in the National Development Plan (NDP) and boost growth. The trouble is that it is becoming harder and harder to believe the government is genuinely focused on growth.

We seldom hear of the NDP these days, unless the government feels the need to trot it out to reassure foreign investors or rating agencies.

And Fitch lists a series of other policy proposals, which it politely says “could have an adverse effect on growth if implemented”. It might have said too that the proposals for the most part go directly counter to the NDP.

The Fitch list includes parts of the mineral resources legislation and visa regulations. Also on the list are the proposed national minimum wage, and amendments to labour laws and land reform.

It is also the case that SA is no longer nearly as virtuous as it used to be on the management of the public purse and of external finances. Fitch draws attention too to the

SA gets credit for being quite well-positioned to weather a ‘sudden stop’ in foreign capital flows

fact that SA’s net external debt, and its public debt, are above the median for its peer triple-B rating group and its inflation rate is higher than that of many other emerging market peers.

But SA gets credit for being quite well-positioned to weather a “sudden stop” in foreign capital flows, and the recent public sector wage settlement and lower-than-expected fiscal deficit for the latest fiscal year have provided reassurance.

Crucially, Fitch draws attention to the fact that SA’s standards of governance and business climate are stronger than those of its triple-B peers. These remain major rating positives, along with a strong banking system, deep local capital markets and sound management of government debt. Just as policy makers should be taking a long, hard look at how to respond more urgently to the growth challenges Fitch poses, so too should they be listening to what Fitch has to say about what’s good about SA — and giving urgent attention to how to nurture and protect that.

At a time when corruption and poor governance are putting some of SA’s important public institutions at risk, the message from Fitch needs to be heard loud and clear.