Signs point to new downgrade as uncertainty blights SA's outlook
Economists warn that policy and political uncertainty could lead to a sovereign credit rating cut in 2017 or 2018
The probability of another sovereign credit rating downgrade is high as SA has been plagued by more policy and political uncertainty, economists warned on Wednesday.
This is compounded by the high level of uncertainty surrounding ANC succession.
The country is preparing for the medium-term budget policy statement, which is taking place in less than two weeks, but the lead-up has been coloured by uncertainty about SA’s policy direction, say economists. Old Mutual economist Johann Els, speaking at an Old Mutual discussion about growth prospects in coming quarters, said: "We’re all feeling a sense of crisis and growth is on a downward trajectory.
"We’re in a period of policy uncertainty, which probably means we’re going to be downgraded by the ratings agencies."
Els said SA needed at least 2% growth to ensure that the government did not fall into a debt trap.
SA had not benefited from improved global growth, despite having an open economy, he said. "There is strength in this global recovery and we are not participating in that.... This is due to the impact of significant political and policy uncertainty on local consumer and business confidence [that has] inhibited consumer spending and business fixed investment."
Markets would pay close attention to any step taken by Finance Minister Malusi Gigaba to keep the fiscal situation under control, with a keen eye trained on the performance of state-owned entities.
While credit ratings agencies may hold on until 2018, BNP Paribas economist Jeff Schultz said the mini budget would be Gigaba’s biggest challenge since taking office in March.
"We expect lower growth, inflation and revenue, along with diminished institutional capacity and burdensome state-owned enterprises, to lead to more delays to deficit consolidation.
"Our tax revenue conditions index suggests the Treasury’s tax buoyancy assumptions are too optimistic in light of the weak outlook for growth, wages and corporate profitability." He said ratings agencies would pay close attention to the outcome of the ANC’s December conference, the lead-up to which has been unpredictable.
"While the revenue slippage will probably not be enough on its own to trigger ratings actions in November, we think further ratings downgrades are inevitable by mid-2018."
Investec chief economist Annabel Bishop said conflicting political and economic policy proposals had weighed down heavily on sentiment levels.
"With the country now in a run-up to the national election in 2019, and the leading party’s presidential election at the end of this year, little is expected to change to accelerate GDP growth over this period, and so weak outcomes are forecast," said Bishop.
SA’s remaining key investment grade ratings are on a negative outlook on the last rung of investment grade.
"Global risk and a domestic recession would likely exacerbate the credit ratings agencies’ concern over SA, resulting in downgrades," she said.