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Growth, fiscal stresses at heart of S&P’s downgrade review, but political tensions a worry

6th April 2016

By: Terence Creamer

Creamer Media Editor

  

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South Africa’s weak growth outlook as well as the country’s fiscal risks – including the possibility that government might need to step in to support State-owned Companies (SoCs) with weak balance sheets – would be the key “pressure points” in Standard & Poor's (S&P’s) assessment of whether or not to downgrade the country’s sovereign rating in the coming two months.

The agency had assigned South Africa a BBB- foreign currency sovereign rating, with a negative outlook, and its next ratings review would be published in June, in line with a ratings calendar determined in South Africa by the Financial Services Board – S&P’s would not be pursuing an out-of-calendar review.

S&P’s on Wednesday lowered its 2016 growth expectations for South Africa to 0.8%, from 1.6% in November, and also moderated its 2017 outlook to 1.8%. The adjustment was more or less in line with forecasts provided by the International Monetary Fund of 0.7% and the National Treasury of 0.9%. S&P’s also noted that domestic growth of 1.3% in 2015 was below the estimated population growth rate, implying a contraction of output per capita by 0.4%.  

Speaking at an S&P’s function in Johannesburg, sovereign ratings associate director Gardner Rusike reported that the current pressures on the South African rating related primarily to the country’s weak growth trajectory and its fiscal imbalances.

However, the June rating’s analysis would also include institutional, external and monetary assessments, with much of the focus likely to be on the domestic environment, including some of the current political tensions.

“When there are political tensions, they can impact on policy implementation,” Rusike outlined, adding that after the uncertainty created by the removal of Finance Minister Nhlanhla Nene in December, government began 2016 on a more positive note by engaging with business and labour on actions that could be taken to bolster growth and reduce the risk of a downgrade.

“But what we have seen more recently is that the focus, or the debates, have shifted to political issues happening in Parliament and at the Constitutional Court . . . which will probably divert government’s [attention] away from the issues of policy implementation, which I think is key. So there is a need to focus the energies on issues around policy implementation, which will help growth.”

In a unanimous judgment, the Constitutional Court recently found that President Jacob Zuma had failed to “uphold, defend and respect the Constitution” when he did not comply with the remedial action taken against him by the Public Protector in respect of upgrades to his private Nkandla homestead.

There was a subsequent attempt to impeach the President in the National Assembly, which was defeated as a result of the African National Congress’s superior numbers in Parliament. There were now several other initiatives under way to place pressure on Zuma to resign, while municipal elections, which were likely to be more highly contested than usual, especially in certain urban centres, had been set down for August 3.

Finance Minister Pravin Gordhan was moving to unite government, business and labour behind the creation of a credible action plan to stimulate growth, primarily by removing domestic constraints to business confidence, investment and enterprise development. However, the Minister was also at odds with South African Revenue Service (Sars) commissioner Tom Moyane and had faced distracting questioning from the Hawks into his knowledge of a Sars investigative unit, which was alleged to have breached certain laws.

COMMODITY DRAG

Besides the political tensions, S&P’s analysis would also take account of other factors weighing on the growth, including the slump in prices for South African export commodities.

Europe, the Middle East and Africa chief economist Jean-Michel Six argued that, with the ending of the commodity supercycle, economies should prepare themselves for a prolonged period of commodity-price weakness.

South Africa's export commodities slumped again between October 2015 and January 2016, with iron-ore falling by more than 20% and platinum by 12%. However, Six argued that the “good news in all the bad news is that commodity prices may have found a bottom recently”.

“There will still be volatility, but by and large it looks like we are now contemplating a more stable environment for commodities, but not a recovery of a meaningful extent any time soon – meaning in the next couple of years,” Six said.

The ratings assessment would also take account of South Africa’s severe drought, as well as structural constraints relating to the country’s labour market and infrastructure bottlenecks, such as electricity shortages.

S&P’s noted that economic growth in South Africa had been on a downward trend since 2011 and that “feeble” economic prospects had also weakened the sentiment of domestic and foreign investors.

Rusike said that the S&P’s would be looking for signs of positive interventions to boost the outlook for domestic growth. “There is little South Africa can control on the external environment, but there is a lot more that can be done to influence domestic factors,” he said.

For instance, S&P’s would be watching for signs of a possible early settlement in upcoming wage talks in the platinum sector, which experienced a debilitating six-month strike in 2014, negatively affecting growth.

It would also be looking for signals that the electricity crisis was easing, investment confidence was improving and that growth-supportive policies were being implemented.

“If steps to address these issues are moved at a better pace, this would help us believe in the medium-term growth potential of the economy,” Rusike said, noting that such steps were required in the context of “numbers that are weak”.

S&P’s would also assess the credibility of government’s fiscal consolidation plan, which was revised and tightened in the February Budget, with a new deficit goal of 3.2% in 2016/17, falling to 2.8% in 2017/18 and 2.4% in 2018/19.

“This is an area where South Africa could find some gains on the ratings factors,” he said, noting that the starting point of the February Budget was positive. “But it will be about believing that those targets can be met.”

There was some concern, for instance, that government might need to intervene to support certain SoCs, such as Eskom or South African Airways, which could lead to slippages against the fiscal-consolidation target.

Edited by Creamer Media Reporter

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