SA’s ratings case will be a tough sell
THE fight is on once again to save SA from a ratings downgrade. Three ratings agencies are visiting SA this week, two of which have SA just one notch away from junk status. They are due to review their opinions on SA’s creditworthiness by the end of 2016. Business and the government are scrambling to put together the best arguments possible for why SA should remain a worthy counterpart for international lenders.
If only we had a strong story to tell. The reality is that the promises made six months ago to sort out state-owned enterprises (SOEs), fix long-delayed policy blockages and address the difficult labour environment have been only partly met.
A downgrade would make it much more difficult for the government and the SOEs to borrow the R212bn they are budgeted to borrow in 2016. It would also make it more expensive for every South African business that relies on credit relationships with lenders in the rest of the world. A downgrade would sharply weaken the rand and put significant upward pressure on interest rates.
Six months ago, in an unprecedented joint effort by business, the government and labour, ratings agencies were won over with promises that long-standing policy blockages would be removed, the government purse prudently managed and the SOEs brought to heel.
All that has been achieved are messy compromises. A case in point is South African Airways, which last week finally delivered its 2015 financial results, revealing a R4.6bn loss. The report is “abridged” and “provisional” because it has not been signed off by the auditor-general.
The loss forced the government to extend another R4.7bn guarantee to the airline, bringing the total guarantee to R19bn, which sits as a contingent liability on the government balance sheet and weakens its overall credit standing.
It is exactly the kind of move that would worry the ratings agencies. To try to calm their fears, a few weeks earlier a new board was announced, which included some strong members but retained Dudu Myeni as chairwoman. This looked like a compromise — keeping Myeni in her job, but hoping the rest of the board would amount to a credible proposition. It is hardly convincing. Other important policy matters, such as the amendment bill to the Mineral and Petroleum Resources Development Act, which has held up investment in the mining sector for well over a decade, were promised to receive fast-track treatment.
Well, that bill is still sitting in Parliament having been sent back by President Jacob Zuma in January 2015. There is a standoff over crucial policy positions on the oil and gas sector, as well as the legal status of the Mining Charter. The fast-tracking appears to have got nowhere.
Other important issues such as the migration of terrestrial television to digital signals are more than a decade late and logjams remain in place.
Business is making a big deal of the R1.5bn jobs fund it has raised to drive the development of small businesses. The jobs fund was meant to be a joint venture with the government, which would match the funds raised. That commitment has gone rather quiet. While the fund, made up of contributions by large listed companies, is a worthwhile achievement, it will take years to develop the infrastructure to fund and mentor the envisaged raft of employment-creating small businesses.
The bottom line is the state of the economy. That, ultimately, is what will tip the ratings agencies’ hands. The first quarter of 2016 saw it contract 1.2%. Much better news was that the second quarter saw growth of 3.3%, leaving growth for the first half at 0.2%. Prospects for the rest of 2016 are uncertain and depend on mineral prices and rainfall. Continuing policy uncertainty and the ridiculous dispute over Finance Minister Pravin Gordhan and his work at the South African Revenue Service have constrained confidence and growth potential.
Business, the government and labour are set to go on another international road show in October to try to convince investors that the country is on the right track. Then Gordhan will deliver his medium-term budget policy statement on October 26. He will need to convince the world that government finances remain firmly in hand, while the road show will have to argue that growth potential has been unlocked.
If everyone can get the message right — that there has been progress on policy and in managing the SOEs, and that the economy is going to rebound — then they will succeed. It is going to be an extremely tough sell.