Government policies dent business confidence
IF INVESTORS needed reminding about the quandary facing South Africa’s Reserve Bank, they just got it from two credit-rating companies.
While statements on Friday from Standard & Poor’s (S&P) and Fitch Ratings left the country’s debt short of a downgrade to junk, both companies gave the same diagnosis for South Africa’s economic malaise: government policies that are denting business confidence and the likelihood of state funding or guarantees that will further strain the budget of President Jacob Zuma’s administration.
The assessments get to the heart of the dilemma facing Reserve Bank Governor Lesetja Kganyago, who is struggling to keep the weakening rand from fuelling inflation at a time when interest rates at their highest level in five years have left gross domestic product growing at since 2009.
Throw in the looming prospect of the US Federal Reserve’s first rate increase in almost a decade – an event likely to accelerate the capital exodus from Africa’s secondbiggest economy – and the task becomes greater still.
“The Reserve Bank is sitting in a classic stagflationary bind, so one has to feel very sorry for them,” George Herman, the head of South African investments at Cape Town-based Citadel Investment Services, said on Saturday.
its slowest pace “The Reserve Bank is not where the problem lies. The problem is that the government doesn’t see growth as the biggest crisis in the country.”
Fitch cut South Africa’s credit rating one level on Friday to BBB-, the lowest investment grade, and in line with the assessment of S&P’s, which lowered its outlook to negative from stable.
The country’s growth potential had deteriorated further, Fitch said, which also cited the government’s decision not to tighten fiscal policy in the face of weakening revenue and rising debt levels.
South Africa narrowly avoided a recession in the third quarter, posting 0.7 percent annualised growth after a contraction the previous three months as electricity shortages, low global demand and falling metal prices stifled output.
“Slow growth will be at the top of the monetary policy committee’s (MPC’s) agenda,” Dawie Roodt, the chief economist at Efficient Group said.
“But they can’t do anything about it.”
Forward rate agreements used to speculate on interest rates on Friday, before the rating company announcements, predicted a 64 percent chance of a 25 basis-point increase in borrowing costs at the MPC’s first meeting of 2016 on January 28, compared with a 24 percent likelihood a week earlier.
Fitch’s second downgrade for South Africa in three years puts its rating on a par with India and Turkey.
The rand, which dropped to a record low of 14.4930 on December 1, weakened 0.4 percent to R14.4389 per dollar as of 12.10pm yesterday.
Yields on rand-denominated government bonds due in December 2026 rose 5 basis point to 8.71percent, the highest since February 2014 on a closing basis.
The cost of insuring against a default by South Africa’s government for five years using credit default swops surpassed that of Turkey, which is embroiled in the Syrian conflict and threatened with sanctions by Russia. The South African contracts rose 2 basis points to 282 on Friday, the highest since October 2.
“Many foreign investors will see the decision by S&P to revise our credit rating to negative as a precursor to a full ratings downgrade to junk status and could start to position their investment for that eventuality rather than wait for the actual downgrade,” said Kevin Lings, the chief economist of Stanlib Asset Management. “The government needs to urgently address the growth, policy and public sector debt concerns.”
Finance Minister Nhlanhla Nene cut tax-revenue projections in his mid-term budget in October.
The government’s ability to carry out reforms was hamstrung by ideological differences in the ruling alliance, Peter Attard Montalto, an emerging-markets economist at Nomura, wrote in a note. – Bloomberg