SA gets benefit of the doubt
Fitch maintaining its rating gives breathing space to reassure investors, says Treasury boss
THE decision by Fitch Ratings agency to affirm South Africa’s rating although it revised the outlook to “negative” would buy the country more time to convince investors that it was serious about succeeding, National Treasury director-general Lungisa Fuzile said on Friday.
Investors in for the long haul had already bought into the future story that South Africa had good prospects for growth and returns, Fuzile said.
“We have what it takes to succeed and we know what it takes to succeed and we are working hard to succeed. What this development does is to buy us a bit more time.”
A rating downgrade would lead to capital flight, rand depreciation, high inflation and more expensive public sector debt.
But Fuzile said South Africa was on a firm footing.
“Quite honestly, I think what we have currently is more than a foundation. We just need to be resolute, very determined, decisive and disciplined and pursue our dream to grow this economy, create more business opportunities, create more work opportunities, and be singleminded about it.”
Fitch highlighted political risk as a major stumbling block that could result in a downgrade. It said ANC factional battles “may undermine government efforts to improve the governance of state-owned entities, which could affect the plan to streamline the SOE [state-owned enterprises] portfolio”.
The plan to build nuclear power stations had been opposed widely because of concerns about governance, Fitch added.
Fuzile said political principals would be best placed to comment on concerns about political stability.
The failure to grow a weak GDP sustainably due to uncertainty about economic policy was another risk to the rating.
Fitch expected GDP growth for South Africa of 0.5% for 2016, a modest recovery to 1.3% next year and 2.1% in 2018. The Treasury expects 0.5% for this year and the Reserve Bank said on Thursday it expected 0.4%.
While the economy was showing signs of recovering from a series of shocks, business confidence continued to be depressed and investment continued to contract.
This year and last year, economic growth was affected by electricity shortages, a severe drought, the fall in international prices of some of the economy’s main commodities and heightened political uncertainty. The latter had eased somewhat after fraud charges against Finance Minister Pravin Gordhan were withdrawn when the National Prosecuting Authority found no evidence of wrongdoing.
The weak growth will result in lower tax revenues next year. The government has revised the budget deficit to 3.4%, from 3.2% in the February forecast.
This would gradually narrow to 2.5% in the 2019-20 financial year. Fitch said the deterioration would have been worse without the lowering of the expenditure ceiling and additional tax hikes next year.
“The fiscal targets now look only mildly optimistic.”
Fitch expected total general government debt, including local government debt, to rise. “The debt structure remains highly favourable, with 90.7% of debt denominated in local currency,” Fitch said.
Increasing net external debt to levels that raised the potential for serious financial strain would also lead to a rating downgrade, as would failure to stabilise the government debt to GDP ratio, or an increase in contingent liabilities.
The Treasury is working to keep the ratio below 50%.
But SOEs remained an important contingent liability to the sovereign rating.
Fitch said it found that debt for nine of the major SOEs amounted to R743-billion, or 18.2% of GDP, at endMarch, of which R280-billion was subject to government guarantees to entities including Eskom.
On Friday, S&P Global Ratings, which will announce its rating of South Africa on December 2, said it would lower Eskom’s long-term corporate credit rating to BB from BB+; the outlook would remain negative.
It cited increased financial pressure faced by Eskom due to an uncertain tariff path from the continuing court case against energy regulator Nersa. S&P also cited uncertainty around the government’s decision to extend the R350-billion government framework agreement, which expires in March next year.
Fuzile said “any development that suggests a step backward should concern us”. It was vital to ensure Eskom was strengthened.
Eskom chief financial officer Anoj Singh said it was confident of an extension to address S&P’s concern.
A strong warning that unless we polish up our political act we’ll be downgraded
The downgrade would not materially affect Eskom’s financing plans until March as it had secured 86% of this funding.
Azar Jammine, chief economist at Econometrix, said: “They are giving us a bit of a benefit of the doubt because they are starting to see the economy show signs of some improvement. They also realise that the current-account deficit is starting to narrow and that’s quite positive.
“What we lose on poor growth, we seem to be gaining through Treasury still holding the fort. But I think there is a strong warning that unless we start polishing up our political act we will be downgraded next time, around June.”
Jammine said there had not been enough positive evidence either with reforms to SOEs or addressing structural impediments to economic growth. Trade unions were opposed to a youth internship programme while a R1.5-billion fund set up by large corporations and the government to assist small business was a drop in the ocean.