Hear the ratings agencies’ message

As the leaders of SA’s governing party prepare for their conference next month they would do well to keep in mind what the major credit ratings agencies have had to say about us in recent weeks.

In its deliberations on policy, the ANC should bear in mind the need to nurture and safeguard the positives the agencies point to while addressing the negatives.

True, nobody likes ratings agencies much. But what they say matters a great deal to the cost at which the government borrows on the markets, as well as its ability to raise more debt.

A government that is already spending almost a fifth of the revenue it raises to service its R4-trillion of debt, and is budgeting to borrow a further R445bn a year over the next three years, cannot afford to ignore their pronouncements.

The government’s cost of borrowing also affects the cost of longer-term funding across the economy, so a governing party that claims to want investment and job creation would do well to take the ratings agencies seriously for that reason too.

SA has since March 2020 been junk rated by all three major agencies, after Moody's Investors Service became the last of the three to take the rating down to subinvestment grade. But not all junk is the same.

For now, SA is still in the double-B range, just below the investment grade triple-B range. It is crucial not to slide down further. In a world of risk-averse, highly volatile global financial markets, many single-B-rated countries — including many in Sub-Saharan Africa — have effectively lost access to the market. That is a disaster for any country that needs to roll over existing debt, never mind raise new debt. And that is not to mention the worse disaster that faces C-rated countries.

Happily SA has managed to improve the outlook on its rating over the past year so that it does not face any immediate threat of further downgrades. That is because Fitch and Moody’s have moved the outlook from negative to stable. S&P has moved it to positive and has recently affirmed this — so an upgrade to the rating itself might even be possible if everything were to go much better than expected. That hardly seems likely, with all three ratings agencies sounding loud warnings about risks to SA’s public finances as well as to its economic and social metrics. Fitch said in an update on Friday that SA’s rating was still constrained by high and still rising government debt, low trend growth and high inequality that would continue to complicate the fiscal consolidation the government has promised.

It made it clear it sees the recent outperformance in government revenue as temporary and that it does not believe the government can hold the line on public sector wages. Fitch therefore has less optimistic projections than the government on deficit and debt metrics.

It believes too that SA’s high inequality will make it difficult for the government to hold the line against spending pressures generally. That is in the context of an economy whose growth it sees slowing from 1.6% this year to 1.1% next year. And it emphasises that SA’s low potential or trend growth rate — which it estimates at just 1.2% — is a key credit weakness.

The government has made progress but the structural reforms on the agenda “are limited in ambition”, will take time and may do no more than offset the underlying deterioration in transport or electricity infrastructure.

The fiscal and growth concerns are largely shared by Moody’s and S&P, which also noted in its recent update that pervasive social and governance issues had reduced support for the ANC and explicitly flagged next month’s ANC conference as one whose outcomes “could determine the pace of reform implementation, including the recommendations of the Zondo commission on anticorruption measures”.

That is why much as the ANC needs to acknowledge the big risks that the agencies flag, it also needs to be alive to the importance of the “strong and effective” institutions, as Fitch calls them, which help to sustain SA’s ratings and prevent them sliding to dangerous territory despite political instability in the country.

Chief of those institutions are the Reserve Bank, the judiciary and the Treasury; a sound banking system is on the list too, as is media freedom.

If the governing party wants the government to continue to borrow what it needs to fund its pro-poor fiscal policies, it would do well to guard those institutions.

WHAT THEY SAY MATTERS MUCH TO THE COST AT WHICH THE GOVERNMENT BORROWS