South Africa will remain on a downgrade “knife-edge” in 2017, Standard Bank chief economist Goolam Ballim warns, despite the bank’s view that the country’s growth will recover to 1.4% this year from only 0.4% last year.
Both Fitch Ratings and S&P Global currently have South Africa on ‘negative watch’, having granted the country a reprieve in 2016. But Ballim says they will be “compelled”, in terms of their respective timetables, to make a decision in 2017 on whether to return the country to ‘stable’, or to downgrade its status to ‘speculative’.
“It’s ordinarily the case that they would make their judgement between 12 and 18 months after first having put us on the radar. We are now into that 12- to 18-month period . . . [and] they cannot kick the can further down the road into 2018.”
Having “dodged the bullets” during 2016 does not automatically imply that South Africa will do so again this year, he cautions.
An analysis of South Africa’s credit default swap (CDS) premiums, or the price for sovereign insurance, highlights the precariousness of the position. In the ten years to 2012, the country’s ‘premiums’ averaged 120 basis points. However, by 2014, the CDS premium had climbed to 200 points and peaked in February 2016 (following the dismissal of Finance Minister Nhlanhla Nene) at 400 points. South Africa’s sovereign-risk premium has since recovered to just over 200 points.
“If we compare our ‘insurance price’ relative to the median of other investment-grade nations and the median of countries in the speculative-grade category, it seems we are more proximate to the speculative category than to the investment-grade category,” Ballim shows.
Therefore, the market-implied downgrade probability is “slightly worse than 50%”, which means South Africa will still need to prove in 2017 that fiscal consolidation remains intact and that tax-policy changes are not “materially growth adverse”.
Ballim expects Finance Minister Pravin Gordhan to raise the marginal rate on high-income earners in his February 22 Budget and use “aggressive” bracket creep to “harvest” about R10-billion of the R28-billion required to meet the consolidation targets outlined in October. He also expects part of the gap to be closed by a higher-than-expected corporate tax take from resources companies, a “windfall” generated by the rise in commodity prices.
However, the ratings agencies will also pay attention to how the “political and succession narrative” unfolds in 2017 when making their assessments.
An acrimonious exchange between what Ballim terms the "reformers and the rent-seekers" in the African National Congress (ANC) could be “detrimental”. But he says there is also scope, despite the current divisions, for a “compromise slate”, rather than the “winner-takes-all slates” of previous ANC elective conferences. The ANC’s fifty-forth national conference will be held in Gauteng from December 16 to 20.
Less likely is a Cabinet reshuffle involving the Finance Minister, despite the authority that still resides with President Jacob Zuma to take such action. “If President Zuma, when he was truly strong, both functionally and naturally, in December 2015, was unable to effect a Finance Ministerial change in his mould, it would seem that, when President Zuma is, arguably, weaker now, his capacity to be able to bring that reshuffle to bear would be so much more difficult.”
That a reshuffle has been threatened for so long, but has not come to pass could also “signal the rigidities that have now crept into the party and an inability, dare I say, of either faction to hold meaningful sway, let alone dominant sway”.
“So in a sense we are in this stasis mode, where there will be attempts at tinkering at the margins and rhetorical overtures, to signal one faction’s ascendency over the other.”