Team SA did enough to ward off a junk rating from Moody’s, but it will have to provide evidence of significant and sustained economic growth and fiscal probity to convince the other ratings agencies that SA deserves to be raised back up to investment grade.
As ever, SA seems divided into two groups: believers and sceptics.
The believers stand ready to act on SA’s vastly improved growth and fiscal prospects following the political transition by investing to take the country forward. They expect a virtuous cycle to take hold of economic growth and fiscal prudence, rewarded over time by ratings upgrades and mounting social cohesion.
The sceptics believe the euphoria is overdone and that President Cyril Ramaphosa will be unable to move fast enough to reduce unemployment and poverty to quell demands for growth-sapping populist policies. They fear that over time a more negative path will emerge in which policy ineffectiveness continues to undermine confidence, growth and social cohesion, frustrating SA’s fiscal recovery.
Finance minister Nhlanhla Nene is firmly in the first camp.
"There is nothing that beats the commitments I see in government and the goodwill I see in all stakeholders, including civil society," he says in an interview with the Financial Mail. "Everyone seems excited about the ‘New Dawn’. Instead of it fizzling out, I think it will get stronger because we all stand to benefit from this."
SA’s near-term prospects certainly look bright following the reprieve from Moody’s, which took a significant risk to the rand off the table, helping to pave the way for a 25bp interest-rate cut from the Reserve Bank last week.
But even before the rate cut, S&P raised its 2018 real GDP forecast for SA to 2% from 1% previously and to 2.1% for 2019, from 1.7%.
GDP growth is poised for lift-off but deep-seated challenges remain
— What it means:
SA’s improved prospects are partly due to strengthening domestic and foreign investor sentiment following Ramaphosa’s election as president, explains S&P in a statement. This has translated into a stronger rand, lower inflation, and lower bond yields while a more favourable inflation outlook has given the central bank room to ease monetary policy. In addition, the synchronised global upturn is boosting demand for commodities and manufactured goods.
"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," says S&P senior economist Tatiana Lysenko.
On the other hand, GDP growth of just above 2%, or 0.5% in per capita terms, is very low for a country at SA’s income levels and much lower than SA’s peers, notes S&P. It is also insufficient to sustainably reduce the country’s very high unemployment levels or change the ratings outlook from "stable" to "positive".
S&P associate director Gardner Rusike says though SA’s rating "may have bottomed" at BB, two notches deep into junk status, and that "the tide may be turning" for the country, S&P is comfortable that the rating is right where it is.
The other big area of concern highlighted by S&P is the reform of state-owned enterprises.
It estimates that central government debt increases from 53.2% of GDP in 2015 to 62.5% in 2018 once the increase in government’s exposure to SOE debt is included.
While S&P considers the management changes at Eskom and other SOEs to be "encouraging", it says deeper reforms are required if these enterprises are to be turned around financially.
The need for deeper SOE governance reform is made strongly by Futuregrowth Asset Management in a new booklet, "SOE Governance Unmasked".
It summarises the insights it has gained over the past 18 months in engaging with four SOEs on their governance policies and practices.
In August 2016, Futuregrowth’s chief investment officer, Andrew Canter, created a furore when he announced his company was suspending new loans to Eskom, Transnet, Sanral, the Land Bank, the Industrial Development Corp (IDC) and the Development Bank of Southern Africa (DBSA).
At the time it was an unprecedented act of investor activism against the erosion of corporate governance and state capture. Since then, Futuregrowth has resumed lending to four of the original SOEs, other than Eskom and Transnet.
In its booklet, Futuregrowth reveals that, among other reforms, it has succeeded in getting the four SOEs to institute limitations to the delegated authority of credit, investment and procurement committees. They will also report publicly all changes to the board and its subcommittees’ terms of reference, mandates and authority levels.
In addition, the Land Bank and the DBSA have agreed to institute a conflict of interest policy to prevent directors from transacting via their investments or projects from the SOE while the DBSA, IDC and Sanral have agreed to disclose publicly all transactions with politically exposed persons.
"It’s been a long, hard journey to get to this point," says Futuregrowth’s credit and equity process manager Olga Constantatos, "but the right steps are being made.
"There are a lot of good people and management teams who want to do the right things," she adds. "Most of them were very transparent and helpful. Now we have quite good relationships with these SOEs and have very regular contact with them."
Due to re-awakened investor appetite, the Land Bank, DBSA and IDC are now regaining market access at better financing conditions.
It’s not that checks and balances don’t actually exist but they weren’t being applied
— Olga Constantatos
S&P’s MD for SA and sub-Saharan Africa, Konrad Reuss, appreciates that progress has been made but says: "We have to remain wide awake; these [governance] issues across the whole SOE sector aren’t just going to go away."
Canter appears to agree. Writing in the booklet’s foreword he says: "We have just witnessed the near-death of SA’s young and legitimate democracy ... SA has, not for the first time in its history, looked into the abyss and has chosen not to jump. But we may still be standing at the edge, and in years to come we must not forget how close the nation came to the precipice."
A key shortcoming of the SOE sector identified by Futuregrowth is a chronic lack of accountability and enforcement of sanction against SOE directors and management for their failure to comply with laws, codes and internal processes.
"It’s not that checks and balances don’t actually exist but they weren’t being applied," explains Constantatos.
For instance, she says that while the Public Finance Management Act gives significant power to shareholder ministries like national treasury to take criminal sanction against board members who transgress, nobody has been prosecuted under the act.
Futuregrowth also suggests that significant improvements be made to the types of disclosures SOEs are required to make. It considers the JSE’s debt listing requirements to be "woefully inadequate" and is pushing to have them made as tough and transparent as those for equity market issuers.
Says Canter: "The investment market standards of reporting on governance matters are pathetic and weak and seem designed to pull the wool over investors’ eyes and are overdue for radical improvement."
But even more crucially, SOEs need the appointment of people of the highest competence and unimpeachable integrity. To ensure this, Futuregrowth argues that all SOEs should apply probity and conflict-of-interest checks and make the results public.
Having a credible management team in place has made all the difference to Eskom, enabling the utility to obtain a R20bn loan facility in February from a consortium of seven local and international banks.
Nene says Eskom’s new management is making progress rooting out corruption. Though it is too early to tell, he believes the utility "is moving away from the situation where it will need further extraordinary government support".
The bottom line for Nene is that growth will be achieved by the state implementing structural reforms and developing strong partnerships with the private sector.
He intends building on the partnership with business formed by former finance minister Pravin Gordhan, saying it provides a platform to deliver further job-creating and growth-enhancing initiatives.
Apart from SOE reform, he says that this year SA can expect the finalisation of the spectrum allocation to increase access to cheaper broadband; the establishment of a single transport regulator to improve the cost effectiveness of the logistics system; the lowering of anticompetitive barriers to business entry; support for labour-intensive sectors; and the opening up of the energy sector.
Treasury estimates that if government can finalise these reforms, coupled with supportive mining policies, SA’s potential growth rate could be raised from 1.5% now to 3.5% or more over the coming decade.
That may not be fast enough for some of the sceptics but it would solve SA’s fiscal problems, invite sovereign credit-rating upgrades and hopefully, in the process, secure SA’s future as a sustainable society.
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