Black middle class key to unlocking SA’s potential and other facts in Moody’s notes on SA
In a surprise move in the dead of night, Moody’s Investor quietly slipped through a set of research notes highlighting the good, the bad and the ugly of the South African economy.
To be clear, the sovereign credit rating agency left a footnote at the bottom of its e-mail, pointing out that its research notes do not constitute any action — no downgrade, no affirmation, just staying put at Baa2 with a negative outlook.
Here’s what Moody’s likes about SA’s economy:
The country has well-developed financial markets
and a well-capitalised banking sector;
The Reserve Bank, the Treasury, the judiciary, the office of the public protector and the auditor-general are among the stars of SA’s institutions, helping to keep key players in check and accountable; and
SA has low foreign currency debt.
Here’s what Moody’s doesn’t like so much:
In the agency’s own words — "protracted political infighting". The credit rating agency thinks this is a stumbling block to policy certainty — the holy grail investors look for before pumping capital into any economy;
The country low growth rut. SA’s growth has been "too low for too long" — its a laggard among its emerging markets peers on this score;
Public debt and government contingent liabilities linked to financially weak state-owned enterprises;
High unemployment, especially among the youth. Two issues here, the high rate of joblessness among the country’s youth "depletes human capital and increases the potential for extended protests".
Here’s what concerning Moody’s:
The credit rating agency projects that per capita gross domestic product (GDP) incomes are in free fall, and SA is unable to keep up because its economy has been in the doldrums for so long. Simply put, South Africans are getting poorer;
There’s little to next to no competition on network sectors;
State-owned entities’ dismal finances;
Although many black South Africans have been lifted out of abject poverty, the black middle class is not big enough; and
SA is an unequal society, this is exacerbated by a high HIV infection rate, and child and maternal mortality rates. This robs the country of realising its potential because it weakens its human capital’s potential.
Finally, SA should not expect a sovereign credit rating upgrade any time soon. The negative outlook has been influenced by "risks to implementing structural reforms to restore confidence and encourage investment, upon which our expectations for gradual growth recovery and debt stabilisation in coming years rely.
"It recognises the downside risks associated with political uncertainty and low business confidence as well as the challenging external environment characterized by low growth, investment and trade."
However, "a rating upgrade is unlikely, we would change the outlook from negative to stable if the government would undertake structural reforms that would bring the economy on a path of higher and sustainable growth and stabilise the general government debt and contingent liabilities relative to GDP ratios.
"Boosting business confidence through reforms in the areas of labour markets, electricity, and state-owned enterprises would be credit positive."