Debt crisis samba not on our dance card — yet
THE outlook for emerging market economies is deteriorating, with Brazil and Russia in recession and the lowering this week of China’s debt outlook to negative.
But South Africa, although facing the prospect of a ratings downgrade to junk, would not see a sharp rise in borrowing costs or a debt crisis, an analyst said this week.
William Jackson, senior emerging markets economist at Capital Economics, said fears that a ratings downgrade could trigger a sharp rise in borrowing costs and a debt crisis in South Africa “look wide of the mark”.
The country’s finances were in poor shape and the government was expected to struggle to tame public debt. The public debt ratio was expected to rise.
“Against that backdrop it would be hardly surprising if the country lost its investment grade,” he said.
A downgrade would damage the ANC’s economic policymaking credibility.
But the real economy — companies that produce goods and services as opposed to the trading of shares and bonds on the financial markets — was a long way from a debt crisis, unlike Brazil.
The budget deficit showed that spending exceeded revenue collection by 4%. Public debt was just under 50% of GDP and foreign currency government debt was under 5% of GDP.
“So a sharp fall in the rand shouldn’t cause the debt ratio to balloon,” said Jackson.
But the government’s dollar- OFF TRACK: Brazilian public servants and students protest against budget cuts — and the dismissal of workers — in the public health, security and education sectors, in front of the Rio de Janeiro state legislature this week denominated debt was more expensive than Brazil’s.
Colen Garrow, Lefika Securities economist, said there was a discount between South African and Brazilian bonds because much of the bad news about Brazil was already being priced in.
“Markets are looking beyond the recession and the possible impeachment of Brazil’s president, to the next movement in inflation and GDP growth, which are lower short-term rates. But in terms of its economic challenges, South Africa was “travelling the same route Brazil has been on for the past 12 months”.
Although South Africa had yet to fall into recession and inflation had yet to peak, elections were looming.
“Hence, the upward trajectory — for now — in South African bond yields. The impact of a ratings downgrade is being factored into South African bond yields,” Garrow said.
Gardner Rusike, a sovereign risk analyst at Standard & Poor’s, said that unlike Brazil, South Africa had subdued positive growth, and fiscal consolidation — to reduce the budget deficit — was broadly on track, while Brazil was backtracking on fiscal targets.
Political tensions here were also within a single party, and not a coalition government as in Brazil.
“The [South African government’s] challenges are probably outside,” he said, referring to consultation between the government, trade unions and the private sector.
Growth was a challenge for all emerging market economies. Quantitative easing from Western economies no longer meant low interest rates, and the increase of money supply into emerging market bonds was over.
Emerging markets were increasingly being perceived as “structurally flawed” in terms of their ability to facilitate economic growth.
Martyn Davies, MD for emerging markets and Africa at Deloitte, said: “All of a sudden countries now have to work to grow. Some will figure it out and some won’t.
“Brics has been shown for what it is. It’s nothing more than a geopolitical grouping, with very little of anything except zero confidence . . . or any recognition really in global capital markets.”