Who would’ve thought just a few months ago, when finance minister Pravin Gordhan was charged with fraud, and the independence of national treasury hung by a thread, that SA would end the year with its investment-grade rating intact?
This week, SA marks the first anniversary of Nenegate — the sacking of respected former finance minister Nhlanhla Nene on December 9. It set in motion the appointment of Gordhan, whose subsequent drive with business and labour under the Team SA banner to retain SA’s investment-grade credit rating has ultimately been rewarded.
Ironically, President Jacob Zuma has congratulated Team SA for having staved off a downgrade to junk — ironic, because if Zuma hadn’t axed Nene, sending the economy into a skid, the Team SA initiative would probably never have been needed.
The good news last Friday night, that S&P Global Ratings had affirmed SA’s "BBB-" foreign currency rating, caused the rand to firm to around R13.80/$ from R13.95/$ at Friday’s close. It was a close call, though, and SA has not escaped the ratings season unscathed.
Though S&P’s affirmation means that all three agencies (including Moody’s and Fitch) have retained SA’s ratings in investment grade, all three also have SA on a negative outlook. Of these, Fitch and S&P have SA’s foreign currency ratings on the lowest rung of investment grade.
Moreover, the decision by S&P to cut SA’s local currency rating by one notch to "BBB" is seen as a warning that more needs to be done to raise the economy’s growth performance so as to reduce its financing needs.
The problem is that SA has used up what little slack it had left and that any further material slippage, on either the side of growth, policy cohesion or fiscal performance, will likely tip the country into junk status next year.
"Ultimately, the country remains precariously close to another ratings downgrade from all three agencies," says Stanlib chief economist Kevin Lings. "SA has another six months to show progress in implementing measures that improve its economic prospects."
Standard Chartered chief economist Razia Khan agrees, saying concerns are still very significant, and unless more structural reform is seen, and more is done to boost growth, SA is still at risk of losing its investment-grade rating.
Citibank economist Gina Schoeman goes further, predicting that the loss of SA’s investment grade rating to S&P is "inevitable" and will probably happen in June 2017.
She assumes that SA will be unable to implement sufficient structural reforms to lift the growth outlook. As a result, SA’s per capita GDP in US dollars will likely remain below the level required by S&P for an investment grade country, while slow growth will continue to place stress on SA’s fiscal flexibility and debt.
SA’s real GDP per capita is $5,140 (R69,904) — significantly lower than the peer group average of $9,188. By S&P’s reckoning, SA is already junk-rated in terms of its GDP growth and GDP per capita income.
So why did S&P, the most bearish of the three rating agencies, not cast SA on the junk heap right now?
The reason, says S&P’s MD for SA and sub-Saharan Africa, Konrad Reuss, is though some deterioration has occurred since midyear, "the slippage was moderate — growth didn’t fall off a cliff, the fiscal targets weren’t missed by much".
Politically, things could also have gone more ill with national treasury. "Political developments around Gordhan could’ve taken a turn for the worse if the charges against him hadn’t been dropped," says Reuss. "That would’ve had a ratings impact had investor confidence and the rand been hit. It did help that a worst-case scenario didn’t come through."
So just how high is the bar to further downgrades by S&P?
S&P notes that the pace of economic growth in SA remains a ratings weakness and that GDP per capita continues to be negative. But in order for this pillar of SA’s investment grade rating to remain intact, all SA has to do is not grow any slower than S&P is forecasting.
Fortunately for SA, S&P has low expectations. It has actually downgraded its growth outlook for SA marginally. It now expects real GDP growth to be just 0.5% in 2016 and 1.4% in 2017 (from its previous expectation of 0.6% and 1.5%) and to rise to 1.8% in 2018.
Moody’s, Fitch and national treasury all expect growth to recover to 2% by 2018, so there is a little bit of space for SA to underperform in the outer year, but the direction of change is paramount — growth must begin to recover.
Downward ratings pressure would also mount if net general government debt and contingent liabilities related to financially weak government-related entities exceed current expectations, S&P warns.
S&P’s expectations are again realistic. It expects net government debt to stabilise at around 49% of GDP in 2018/2019 as opposed to government’s projection that it will stabilise at 47.9% in 2019/2020. So as long as treasury’s fiscal consolidation efforts remain broadly on track, this pillar of SA’s investment grade rating should also be okay.
Third, S&P says it could also lower the ratings if it believes that institutions have become weaker due to political interference affecting government’s policy framework.
Crucially, S&P views political tension in SA as high and rising:
"We think that ongoing continued tensions and the potential for event risk could weigh on investor confidence and exchange rates, and potentially affect government policy direction."
Fitch and Moody’s also highlighted the negative impact of politics on economic development in their assessments, with Fitch listing it as a key driver of its decision to change SA’s ratings outlook to "negative".
Fitch also expects infighting within the ANC and government to continue over the next year. "In Fitch’s view, this will distract policymakers and lead to mixed messages that will continue to undermine the investment climate, thereby constraining GDP growth," it said in its recent statement.
On the other hand, S&P has taken comfort from the fact that SA’s key institutions work, and that the country’s vibrant civil society and media have pushed back strongly against cronyism and corruption. "SA has a strong democracy with independent media and reporting. We also believe it will maintain institutional strength, particularly regarding the judiciary, which provides checks and balances and accountability where the executive and legislature have appeared less willing to do so," S&P says.
The bottom line is that as long as SA is able to engineer a modest growth recovery and stick to its fiscal consolidation path, it should be able to avoid junk status. If Gordhan remains in charge of treasury, SA’s odds are better than even, but don’t expect an easy ride. SA’s fraught politics should ensure that it remains all but plain sailing.
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