Sona: Ramaphosa must walk the talk
KUDOS for President Cyril Ramaphosa’s State Of the Nation Address (Sona). It complements his Treasury and business drive to lure foreign direct investment in South Africa.
More so, it is aimed to steer the country away from doom and gloom and restore confidence after corruption and allegations of state capture left the economic landscape littered with failed state-owned enterprises (SOEs) such as Eskom and SA Airways.
It is not that he had any choice, though. The spiralling debt of SOEs, especially Eskom, together with an ailing economy that missed out on the global upswing over the past three years threatened the country’s credit rating.
Whether we like it or not, the cost of borrowing both locally and abroad by governments are heavily influenced by the credit ratings assigned to them by the credit ratings agencies such as Fitch, S&P Ratings (S&P) and Moody’s.
Sometimes the agencies are accused of trying to influence monetary and fiscal policy or want to influence political outcomes.
The credit ratings are based on various factors such as political and economic stability and most are forward-looking while the cost of borrowing by a government is reflected in the yield the market is prepared to accept on bonds issued by a national government, generally with a promise to pay periodic interest payments and to repay the face value on the maturity date.
The normal benchmark to compare countries’ debt is the yield on 10-year government bonds.
It is reasonable to expect that the market wants to be compensated for additional risk and it is best illustrated by the countries’ 10-year government bond index yields compared to their corresponding credit ratings.
I use the average credit risk ratings of Fitch and S&P as an indication of a specific country’s credit risk.
When compared to other countries in BRICS (China, India, Brazil, Russia and South Africa) it is evident that our 10-year government bond is correctly priced given the country’s credit rating.
This tells me that investors in the South African bond market, rightly or wrongly, are saying to they agree with the rating agencies.
South Africa and Brazil are the only members of BRICS that fall in the speculative grade or whose bonds are seen as “junk”.
On the African continent Botswana, Morocco and Namibia are all investment grade while South Africa, Kenya, Nigeria, Uganda, Egypt and Zambia fall in the speculative grade.
Morocco’s bond yield and credit risk is more in line with the country’s neighbours across the Mediterranean such as Portugal and Italy.
South Africa finds itself in line with the Africa ex Morocco yield to corresponding credit rating curve and it therefore confirms that the South African 10-year government bond is correctly priced.
Although the BRICS yield to corresponding credit rating curve indicates that a further cut in South Africa’s credit rating will result in a mere up-tick in the yield of the 10-year government bond index, it should be kept in mind that Brazil’s bond yield indicates that the market is anticipating a ratings upgrade soon.
Most alarming is the fact that if South Africa does not get it right and suffers further cuts in credit ratings, especially by Moody’s, will mean that the country will fall out of world government bond indices such as Citigroup World Government Bond Index and may force selling of more than $7 billion (about R100bn) worth of bonds.
We may, therefore, soon move up the Africa ex Morocco yield to corresponding credit rating curve and end up where Kenya finds itself.
That will mean a jump of more than 300 basis points to 12 percent plus from the current 9 percent. The results will be devastating to say the least.
Purchasing power of savers will be decimated, severe capital losses in fixed interest assets in retirement funds, job losses will rocket as businesses fail and poverty will reach unprecedented levels.
Yes, economic Armageddon is a failed state. Is that what the detractors of the president and his A-team are gunning for?
Yes, the significant oil and gas find off Mossel Bay will be a major boost for the economy over the medium term and will alleviate the economic paralysis.
At this stage it is evident that the markets and credit agencies are giving us some breathing space.
However, it is imperative that Ramaphosa walk the talk of his Sona and provide more clarity and certainty on the issues he raised. He and his A-team cannot afford to fall prey to their detractors and go back on the president’s Sona ahead of the upcoming election.
We know that next week’s Budget will be a difficult one but what this country needs is economic stability and certainty to restore business and consumer confidence and at the same time dignity.