Downgrade hangs over SA, warns S&P
S&P Global Ratings says weak government-related entities remain a danger
S&P Global Ratings has once again warned SA that its sovereign credit rating hangs in the balance if it enters recession, or wealth levels decline in dollar terms, but local observers are upbeat the economy has seen the worst behind it.
S&P has SA rated on its lowest rung of investment grade status at BBB-. A negative ratings action from the agency would result in SA entering subinvestment, or junk, status.
However, this comes as the South African Chamber of Commerce and Industry (Sacci) business confidence index showed on Wednesday that business sentiment had held steady in December 2016 compared to 2015.
In regional reports on emerging markets’ sovereign ratings trends, S&P, which has SA on a negative outlook, said: "Downward rating pressure would also mount if net general government debt and contingent liabilities related to financially weak government-related entities exceeded our current expectations.
"A reduction in fiscal flexibility may also lead us to further narrow the gap between the local and foreign currency ratings."
Nedbank economist Nicky Weimar said there remained a 50% chance SA could be downgraded in June, but Sacci CEO Alan Mukoki said there was a higher probability of economic conditions improving.
Weimar said SA’s objective indicators, such as economic growth, reliance on external financing, fiscal metrics and economic policies provided a varied picture. "I think what saved us in December is the belief that [Finance Minister] Pravin Gordhan is still there and ratings agencies believe he will do what he said he will do. There is still a vulnerability but for now that probably holds."
She said economic policy had deteriorated dramatically over the past couple of years, resulting in policy uncertainty, which is something ratings agencies have emphasised continuously. "That is bad and I don’t think it’s going to get better in the year you choose your new leadership within the ANC. You’ll probably get that it will worsen and they [S&P] will probably anticipate that."
Weimar said there was likely to be little progress on improving state-owned entities, which are reliant on government funding. If the rand held steady, this would make SA’s prospects more compelling.
"That would probably mean the Reserve Bank won’t feel the need to hike interest rates any further … Food prices [would] come down — that boosts disposable income. [With] interest rates coming down, consumers have a bit of cash in their pockets again," she said.
Mukoki said: "[There is a] high probability there will not be a junk status … because the conditions will not deteriorate from where we are. Either we continue to get a stay of execution or they [credit rating agencies] will say we are on a watchlist, or things improve."
Mukoki said he hoped the improving business confidence was indicative of the fact that perhaps people had gone past the August issues around local government. Life had continued as normal after rating agencies provided a reprieve in 2016
and "people [were] a little bit calmer even…".
We need the private sector to be incentivised to commit to investment and taxes increasing might [be a] disincentiveLumkile Mondi
Economist Lumkile Mondi, however, said the prospect of higher tax rates after the budget was tabled in February remained a dark cloud over economic growth momentum.
"We need the private sector to be incentivised to commit to investment and taxes increasing might [be a] disincentive." But also uncertainty over the finance minister’s position remained a red herring. While Gordhan was wholly supported by the SA collective, from a political perspective, he remained uncomfortable in his position. "That uncertainty remains a concern, more particulay because there’s lot of murmuring around cabinet changes." How they played themselves out would "feed into the equation of a potential downgrade or keeping things steady", he said.
The monthly Sacci index, which tracks 13 sub-indices, registered a marginal decline of 0.1 index point to 93.8 in December 2016 from 93.9 in November. But the most notable difference was an improvement from a year ago when the index plunged 10.1 index points in December 2015.
Sacci said the latest reading was the first time in 10 months that the index had improved on a year-earlier period. It said the index had recovered well until July 2016 when it touched 96, after which it contracted to a low of 90.3 in September. Towards the end of 2015, the index had improved slowly and gradually, and remained steady.
Five sub-indices contributed positively between November to December, led by improvement in merchandise export and import volumes, the rand exchange rate and the real value of building plans passed. Six sub-indices weighed negatively.
The US dollar price of precious metals, credit to the private sector, real retail sales and share prices had the largest negative effect on the index from November to December 2016.