EDITORIAL: A black day for the country
‘In our opinion, the executive changes initiated by President Jacob Zuma have put at risk fiscal and growth outcomes’ — S&P Global Ratings
So the inevitable has happened: SA’s debt has been "junked". In some ways it’s less surprising that SA’s debt has been downgraded to junk status than the speed with which it happened. Perhaps also surprising is the fact that S&P Global Ratings maintained the negative outlook. That constitutes something of a kick in the guts to a downed man.
The opening comment of S&P’s statement makes it crystal-clear why the decision was taken: "In our opinion, the executive changes initiated by President Jacob Zuma have put at risk fiscal and growth outcomes."
The major blame for this decision has been squarely laid at the table of the president, but it was not just the decision to replace Pravin Gordhan and a host of other cabinet members. S&P was also plainly concerned not just by the change in personnel but by the risk that these changes could yield "policy shifts" that would undermine fiscal and economic growth.
What these policy shifts might be, the agency did not specify, but it did raise concern about the governing party’s internal divisions, which could "delay fiscal and structural reforms". It also specifically raised the possibility that the trust established between business leaders and labour representatives could be eroded. And as it has in the past, it fretted about investor confidence and the decision by business to hold back on investment.
But beyond the politics, S&P raised a further issue: the South African government’s contingent liabilities. Guarantees utilised by public enterprises are expected to reach R500bn in 2020, or 10% of GDP in 2017. These are the loans guaranteed by the government taken out by state-owned enterprises.
The main issue here, of course, is Eskom, which currently has a R350bn guarantee framework. S&P estimates that Eskom will have to fund a revenue gap of R70bn. Other parastatals are mentioned, including the South African National Roads Agency and South African Airways.
This could have implications for SA’s overall debt, which has increased to 48% of GDP in 2017, from 30% in 2010. Although S&P does note that less than a 10th of government’s stock is denominated in foreign currency, it also makes the point that nonresidents hold about 35% of the government’s rand-denominated debt. That could make financing costs vulnerable to foreign investor sentiment and exchange-rate fluctuations.
What are the immediate implications?
In the interim, it means that SA has a split rating, with both Fitch and Moody’s, of the major ratings agencies, currently retaining SA’s investment-grade rating. But that could change fast, with Fitch due to bring out its view at the end of the week. Even if Fitch follows S&P’s lead, Moody’s has SA two notches above junk status, so a kind of split will remain for some time — for how long we do not know.
That’s significant because it means SA’s bonds could still remain part of key international tracker funds, which invest passively around the world. Normally, they would boot SA from the trackers only if both Moody’s and S&P rated SA’s debt "junk".
Guarantees for public enterprises are expected to reach 10% of GDP in 2017
It’s worth noting, too, that the interest rate on SA’s debt is already high, and higher, in fact, than for many countries whose debt has already been junked. SA’s credit-default swaps, which measure the cost of insuring debt, trade in the same region as Brazil, which is two steps below junk status.
Still, this is a huge setback for SA. The trust that the ANC government had painstakingly built over years with international investors has been catastrophically demolished.
Social activists and political opposition groups called for South Africans to dress in black on Monday in protest against the sudden cabinet changes. Turns out, it was a prescient decision. It is, indeed, a black day for the country.