S&P reality check for SA: deteriorating debt and deficit outlook is a problem
The ratings agency's analyst questions how quickly reform efforts will ease structural constraints to economic growth
Ratings agency S&P Global injected a note of reality into the ratings optimism on Tuesday, reminding SA that though February’s budget was much better than October’s medium-term budget, the deficit and debt projections were still worse than in 2017.
The agency, which in November junked SA’s local currency rating, also said the country’s economy was not growing nearly fast enough to justify an upgrade — even though its sovereign analyst Gardner Rusike said he brought “some good news”, with S&P doubling its growth estimate for 2018 from 1% to 2% and for 2019 to 2.1%, up from 1.7%.
These projections are higher than the forecasts of 1.5% for 2018, rising to 1.8% for 2019, the Treasury pencilled into February’s budget.
However, Rusike said the targets in budget 2018 still showed fiscal deterioration compared to a year before, even though they were better than in October’s medium-term budget and S&P was happy with the improvements. “SA is now on a good path but the new fiscal measures don’t yet provide debt stabilisation in the near term.”
Rusike also warned that despite the political transition and the recent improvements in SA’s economic growth figures, the growth rate was below the average of countries with similar wealth levels and well below its ratings peers. “If growth is much higher than we project you could have upside to the rating, but it needs to be substantially higher,” he said.
The rating might have bottomed, he said: “We are now in a good situation that supports our stable outlook, but not anywhere near going upward as far as the rating is concerned.”
By contrast, the almost 300-strong audience at S&P’s annual conference in Johannesburg this week proved to be a lot more bullish, with more than 50% expecting an upgrade of at least one notch to SA’s sovereign rating by the time of S&P’s next annual conference in 2019.
A snap poll showed 37% expected a one-notch upgrade and a further 16% a two-notch upgrade, while 47% expected no upgrade to the rating.
S&P’s caution was a contrast to the more positive message from Moody’s Investors Service, which on Friday night upgraded its outlook on SA’s rating from negative to stable and affirmed the rating at investment grade — allaying fears that the country could have been junked by all three agencies.
The unexpectedly upbeat report from Moody’s prompted some economists to ask whether S&P was wrong to downgrade SA in November. In an economic update on Tuesday, S&P senior economist Tatiana Lysenko said new leadership and ensuing policy announcements had boosted local and foreign investor confidence, but structural challenges remained.
“A revival in confidence and lower funding costs should support business investment, while a boost to real income from lower inflation bodes well for household spending. This should more than offset any drag on growth from the announced fiscal tightening.”
But Lysenko questioned how quickly reform efforts would ease structural constraints to economic growth.
“The government has taken some steps to improve governance of SOEs [state-owned enterprises], which is an important development, but we are yet to see reform progress in other areas. A key constraint is the rigid labour market with its inefficient wage-setting mechanisms and higher barriers to entry and exit,” Lysenko said.
On Eskom, S&P said it remained unclear how the power utility’s liquidity issue would be resolved, despite the overhaul of the board and the extension by banks of a R20bn short-term credit line.
“The budget didn’t reveal a plan,” said S&P corporate ratings director Omega Collocott, explaining on Tuesday why the agency had again downgraded its rating on Eskom at the end of February, taking it deeper into junk territory.
S&P’s calculations show SA’s real per capita GDP growth in dollar terms over the past 10 years is now marginally positive, thanks to the recent appreciation in the rand exchange rate, but at close to zero it is still far below the 2% average of its emerging market peers.