A DEEPENING DESCENT

SA is on the ropes. The pounding it has taken from ratings agencies reflects the extent to which its fundamentals have deteriorated.hope is fading that the situation can be turned around any time soon

Last Friday SA failed its fiscal fitness test. Hopes were dashed that all the ratings agencies would hold off further downgrades until the outcome of the ANC’S December elective conference. SA is considered a rubbish bet by S&P Global Ratings and Fitch, and Moody’s is a hair trigger away from concluding the same.

Since 2012, SA’S credit-rating descent has been steep, mirroring the erosion of the country’s economic performance, key institutions and public finances. Having peaked four notches above junk in 2009, SA’S international ratings are now roughly back in the same position as they were in the early 1990s, all fiscal progress having been wiped out.

The heart of the problem is that SA’S growth rate has been too low for too long. The country’s economic growth performance remains among the weakest of the 20 major emerging market countries, having posted negative per capita income growth for several years. Only Qatar and Venezuela are likely to show slower per capita growth this year.

Further downgrades from S&P last Friday night, just eight months after it junked SA’S foreign-currency rating on former finance minister Pravin Gordhan’s dismissal, take this rating even deeper into junk territory (BB) and its local-currency rating into junk territory for the first time (BB+). The outlook is stable.

Fitch stood pat last week, keeping both SA’S international and local ratings on the top rung of the junk ladder, but Moody’s, which has SA’S ratings on the last rung of investment-grade, put SA under review for a downgrade. It has given SA just three months to show why it shouldn’t also junk its ratings.

This implies that further cuts are highly likely unless the ANC elects a new administration in December that is able to change tack decisively.

“We have a very short window to change the outlook for the economy, and decisive action is required to prevent further downgrades next year,” says Nedbank Group CEO Mike Brown. “We urgently need to accelerate economic growth, which will require policy clarity, structural reforms and restored faith in governance in order to lead a recovery of consumer and business confidence.”

Though SA’S growth prospects and fiscal position have deteriorated markedly since the agencies’ previous reviews, the negative ratings action still rattled economists and the markets, if only briefly in the case of the latter.

The rand lost 27c initially against the US dollar, from R13.88/$ before the downgrades to R14.15/$ on Saturday, but then confounded analysts by climbing to a fiveweek high of R13.77/$ by Tuesday morning. Dollar weakness and rand short covering explain some of the rand’s moves.

Over the past eight months there have been two cabinet reshuffles, confusion over the nuclear programme and mining charter, a steep deterioration in the debt trajectory and growth outlook, further evidence of state capture, and continued policy paralysis.

All these developments have sent a message to the ratings agencies of SA’S deepening descent.

Moody’s lead sovereign analyst for SA, Zuzana Brixiova, summed it up well: