Rat­ings jit­ters sub­side for now

SA gets a re­prieve from agen­cies but con­cern re­mains over pol­icy un­pre­dictabil­ity from ANC

Sunday Times - - BUSINESS TIMES - CLAIRE BISSEKER bis­sek­[email protected] Com­ment on this: write to let­[email protected]­nesstimes.co.za or SMS us at 33971 www.sun­day­times.co.za

SOUTH Africans breathed a sigh of re­lief on Fri­day night when the coun­try sur­vived an­other round of credit rat­ing re­views with no fur­ther sov­er­eign rat­ings down­grades.

Though there was only an out­side chance that Fitch and S&P Global Rat­ings would cut the coun­try’s rat­ings again, hav­ing junked South Africa in April on Pres­i­dent Ja­cob Zuma’s mid­night cab­i­net reshuf­fle, the rat­ings re­main a con­stant source of anx­i­ety to South Africans and fi­nan­cial mar­kets.

The only dis­ap­point­ment is that S&P re­tained its neg­a­tive out­look on both South Africa’s lo­cal and for­eign cur­rency rat­ings, sug­gest­ing that it fears the coun­try has fur­ther to slide.

But it could have been far worse. The agen­cies’ de­ci­sions to af­firm South Africa’s rat­ings give the Trea­sury at least an­other six months to get its house in or­der and to match its prom­ises of fis­cal pru­dence and con­fi­dence­boost­ing re­form with ac­tion.

The rat­ings from S&P are split. South Africa’s lo­cal-cur­rency debt is ranked BBB-, on the bot­tom rung of in­vest­ment grade, and its for­eign­cur­rency debt is at the top of the junk lad­der, at BB+. All South Africa’s rat­ings with Fitch are BB+.

Though both agen­cies con­tinue to em­pha­sise South Africa’s long-stand­ing weak­nesses — low-trend GDP growth, ris­ing debt, de­te­ri­o­rat­ing gov­er­nance, and the size­able con­tin­gent li­a­bil­i­ties posed by weak state-owned en­ter­prises — a new con­cern has been raised; that of eco­nomic pol­icy un­pre­dictabil­ity.

The con­cern is not that South Africa’s novice Fi­nance Min­is­ter Malusi Gi­gaba is go­ing to run looser fis­cal pol­icy — both agen­cies ex­pect only mi­nor fis­cal slip­page due to lower growth. Rather, the risk is that growth could suf­fer if the ANC tacks left to­wards more pop­ulist and in­ter­ven­tion­ist poli­cies. This could be in re­sponse ei­ther to so­ci­etal pres­sure or fac­tion-driven ANC in­ter­nal pol­i­tics.

Fitch notes in its state­ment that ten­sions within the ANC have un­der­mined pol­icy pre­dictabil­ity as it is un­clear which fac­tions will pre­vail on in­di­vid­ual pol­icy is­sues.

It ex­pects party in­fight­ing to re­main strong ahead of the elec­toral con­fer­ence in De­cem­ber 2017, when the ANC will se­lect a new party pres­i­dent. The new party leader is likely to be­come the coun­try’s pres­i­dent af­ter na­tional elec­tions in 2019 or ear­lier.

Though lead­ers have em­pha­sised that the re­cent rhetoric of “rad­i­cal eco­nomic trans­for­ma­tion” has sig­nalled no fun­da­men­tal change in pol­icy direc­tion and that the govern­ment re­mains fo­cused on the goal of in­clu­sive growth, Fitch is not fully con­vinced.

S&P is also con­cerned, not­ing that in­equal­ity, poverty, and high un­em­ploy­ment “have the po­ten­tial to shift pol­icy to­wards in­ter­ven­tion and in­come re­dis­tri­bu­tion at the cost of head­line GDP growth”.

S&P’s “neg­a­tive” out­look re­flects its view that po­lit­i­cal risk will re­main el­e­vated this year. This could dis­tract from growth-en­hanc­ing re­form, slow the pace of fis­cal con­sol­i­da­tion, and weigh on in­vestor and con­sumer con­fi­dence.

Nev­er­the­less, S&P ex­pects South Africa’s real GDP growth to re­bound from 0.3% last year to 1% in 2017 and av­er­age 1.5% up to 2020, thanks mainly to an im­prove­ment in agri­cul­ture and higher com­mod­ity prices.

This is in line with the pre­vail­ing con­sen­sus but above the Trea­sury’s Fe­bru­ary forecast, which Fitch de­scribes as “op­ti­mistic”.

De­spite this, both agen­cies ex­pect Gi­gaba to de­liver on his un­der­tak­ing to re­main within the ex­pen­di­ture ceil­ing. Fitch, how­ever, feels this will not be enough to prevent bud­get deficits from re­main­ing sticky at around 3% of GDP.

Though S&P ex­pects Gi­gaba to get net govern­ment debt to sta­bilise at around 50% of GDP over the medium term, it con­tin­ues to rate SOEs with weak bal­ance sheets as the biggest risk to the debt out­look.

And it doesn’t be­lieve that re­forms to this sec­tor will be im­ple­mented any time soon.

It sin­gles out Eskom, not­ing that “plans to im­prove Eskom’s un­der­ly­ing fi­nan­cial po­si­tion may not be im­ple­mented in a com­pre­hen­sive and timely man­ner as it is still ad­dress­ing its gov­er­nance is­sues”. Eskom still has to com­plete its board ap­point­ments and ap­point a per­ma­nent CEO.

Fitch re­veals the shock­ing statis­tic that not only do the govern­ment’s guar­an­tees to SOEs, in­de­pen­dent power pro­ducer con­tracts and pub­lic-pri­vate part­ner­ships amount to 10% of GDP, but SOEs’ non-guar­an­teed debt con­sti­tutes an­other 10.5% of GDP, tak­ing the to­tal to al­most R1-tril­lion.

“Given the weak state of SOE fi­nances, the prob­lems in SOE gov­er­nance and the im­por­tance of SOEs for the coun­try’s econ­omy and pol­i­tics, the risk that some of this debt will land on the [coun­try’s] bal­ance sheet is sub­stan­tial,” it con­cludes.

S&P says it would con­sider low­er­ing South Africa’s rat­ings if its fis­cal and macroe­co­nomic per­for­mance de­te­ri­o­rates sub­stan­tially from its base­line fore­casts.

For Fitch, a marked in­crease in the debt-to-GDP ra­tio or in con­tin­gent li­a­bil­i­ties, steeply ris­ing net ex­ter­nal debt, and a fur­ther de­te­ri­o­ra­tion in trend GDP growth could in­di­vid­u­ally or col­lec­tively re­sult in a neg­a­tive rat­ing ac­tion.

The Trea­sury re­sponded by say­ing that its key fo­cus was to “safe­guard con­fi­dence and re­claim the in­vest­ment-grade rat­ings” and that for this to oc­cur, sus­tain­able fis­cal pol­icy and ef­forts to tackle the sources of low growth would be crit­i­cal. It also con­firmed that the rhetoric of “rad­i­cal eco­nomic trans­for­ma­tion” did not im­ply a fun­da­men­tal pol­icy shift.

Fitch is not fully con­vinced the re­cent rhetoric of trans­for­ma­tion has sig­nalled no change

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