Experts say economic slowdown is a concern but not a crisis

STRESS tests carried out by Goldman Sachs show that despite its current challenges and vulnerability to the Chinese economy’s slowdown, South Africa remains resilient to the kind of shocks that would hit foreign capital inflows, and is unlikely to sink into a financial crisis, according to Colin Coleman, the investment bank’s MD for sub-Saharan Africa.

In response to requests from its clients, he said the bank had carried out research comparing South Africa to other emerging economies that had experienced crises and concluded that there was only a small chance of a “sudden stop” in foreign capital inflows, which would make it harder to finance the country’s current account deficit.

Even in the worst scenarios, such as a widespread internal “social disruption” or foreign capital outflows, South Africa had plenty of shock absorbers in the form of a flexible exchange rate, low levels of foreigndenominated debt, $500-billion (about R7.1-trillion) worth of assets under domestic management and strong financial architecture, Coleman said.

This meant that, depending on the scenario, it would take between six months and two years before the country would run out of foreign exchange reserves and require assistance from the IMF or the Brics countries — a term coined by Goldman Sachs in reference to Brazil, Russia, India, China and South Africa.

“South Africa’s recent economic slowdown, high unemployment and rising inflation are definite cause for concern, but South Africa is resilient and the trends are not cause for panic,” Coleman said at a presentation at the Gordon Institute of Business Science on Wednesday night.

The data should “give confears fidence to private and public sector fixed investors, as well as domestic and international institutional investors, and calm of an impending crisis,” he added.

Nonetheless, there were potential future vulnerabilities such as the external borrowing needs of ailing state-owned enterprises, he pointed out.

These could be addressed through a combination of tariff hikes, modernisation reforms and private sector participation, as well as a shift towards domestic sources of debt funding.

The National Treasury has flagged the borrowing needs of state-owned enterprises such as Eskom, Transnet and SAA as a threat to its goal of keeping its debt and spending in check, which is a major consideration for global ratings agencies assessing a country’s sovereign credit rating.

Both Standard & Poor’s, which has given South Africa the lowest investment grade rating of BBB-, and Fitch, which has put a negative outlook on its BBB rating for the country, are due to announce their annual updates on Friday.

Credit ratings matter as they affect a government’s cost of debt and investor appetite for its assets.

Coleman pointed out that if South Africa lost its investmentgrade credit rating, it would be “destructive” for foreign portfolio inflows — the term for purchases of domestic stocks and bonds.

But, he added: “My impression is that the key factor affecting our ratings is our growth rates.

“Driving growth must be the key objective of government, business and labour.”

Despite a slew of negative economic data, analysts do not believe that S&P will downgrade South Africa this week or even give its BBB- rating a negative outlook, but there is a good chance that Fitch will downgrade the country to the same level as S&P — one notch above “junk” status.

Coleman said his proposals to spur the country’s sluggish pace of economic growth through a government-led initiative negotiated with business and trade union partners had been positively received by government officials in the past few weeks. But he acknowledged that it might be challenging for the ruling ANC to support and drive reforms two years ahead of its leadership succession.

South Africa is resilient and the trends are not cause for panic