S&P Global Ratings has taken a dispassionate look at the improved landscape under president Cyril Ramaphosa but found the green shoots of renewal too weak to justify an upgrade to SA’s credit ratings outlook.
In contrast to Moody’s upbeat review in March, S&P’s assessment delivered over the weekend strikes a sceptical note. It has kept all SA’s credit ratings at a subinvestment (junk) grade and held the outlook as "stable", emphasising the "increased" fiscal risks and "considerable" socioeconomic challenges the country faces.
In March, Moody’s changed the outlook on SA’s investment-grade ratings from "stable" to "positive", saying it saw scope for SA to enter a virtuous cycle of economic growth, fiscal prudence and mounting social cohesion.
S&P’s assessment coincided with the end of Ramaphosa’s first 100 days in office. As a review of SA’s creditworthiness compared to the position on November 24 2017, it provides an important perspective of the effect of Ramaphosa’s election on the country’s macroeconomic fundamentals.
S&P’s conclusion is that though the recent political transition and the policy reforms being pursued could support firmer economic growth and stabilise SA’s public finances over the medium term, the structural impediments to growth remain high.
It notes that SA faces significant challenges in the form of high poverty, unemployment and economic inequality, all of which break along racial lines.
For SA to earn a ratings upgrade, says S&P, will require government to introduce structural economic reforms that actually deliver higher competitiveness and employment, allowing a significant, sustained improvement in economic growth and public finances.
"It is more critical than ever that SA avoids complacency and commits to the challenge of restoring growth, creating jobs and addressing inequality," says Nedbank CEO Mike Brown in noting that S&P’s ratings affirmation at best represents a sideways move for SA.
This is not to say that S&P doesn’t expect economic activity to rebound in the short term. It is even more bullish on SA’s 2018 growth prospects than government, forecasting a strong uptick to 2% growth this year on firmer private-sector fixed investment and higher household consumption. By contrast, national treasury’s 2018 real GDP growth forecast is just 1.5%.
However, S&P notes that even at 2% growth, SA’s per capita income growth will be less than 1%. Among the 20 major emerging markets, only Qatar will show slower per capita growth in 2018.
At just an estimated US$7,200 this year, SA’s per capita GDP is below that of its emerging-market peers. This constrains the rating.
S&P acknowledges that some progress has been made and that Ramaphosa’s election has given renewed impetus to the reform agenda. It isn’t even particularly concerned about the potential impact on investment as a result of the land expropriation debate, citing the checks and balances embedded within SA’s institutional framework and the country’s constitutionally independent judiciary.
"It is still too early to tell how the [land reform] process will unfold, but we expect that rule of law, property rights and enforcement of contracts will remain in place and will not significantly hamper investment in SA," says S&P in its review.
This is a significant plus factor but, despite this conclusion, S&P still regards the country’s growth prospects as "tentative" and its fiscal position as "weak".
Though it concedes that government is taking steps to reduce the fiscal deficit and the pace of debt accumulation, it notes treasury’s own projection that net government debt is set to keep on rising from about 50% now to 52% by 2020/2021 and that debt-servicing costs will remain close to 12% of government revenue.
Once the debt of local government and public sector companies is included, S&P estimates SA’s overall public sector debt is currently 70% of GDP.
In fact, it considers the fiscal risks posed by state-owned enterprises (SOEs) to have increased, noting that they could require further extraordinary government support than is currently provided for in the national budget.
"For S&P to restore SA’s investment-grade rating, it will need to be convinced that the country has resolved the solvency issues of the SOEs and implemented the governance, business strategies and balance sheet reconstruction needed to ensure their long-term financial stability," says Brown.
Responding to S&P, treasury said government was determined to improve SA’s credit ratings. To this end it would be taking steps to improve business confidence even further, achieve higher economic growth and fast-track reform of SOEs.
Fitch Ratings, which has SA ranked one notch below investment grade, is due in SA this week and is expected to provide an update in June.
S&P’s next update is scheduled for November 23.
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