Absent growth SA’s junk escape may be short-lived

16th December 2016

By: Bloomberg

  

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South Africa’s chances of repeating its escape from a junk credit rating in 2017 are in the balance as focus intensifies on tepid economic growth and simmering political tensions.

S&P Global Ratings kept its assessment of the nation’s foreign-currency debt at one level above noninvestment grade on December 2. S&P’s affirmation followed a similar move by Fitch Ratings, while Moody’s Investors Service rates the debt one level higher. The reprieve may be short-lived if government does not act to accelerate economic growth, according to Piotr Matys, an emerging-market currency strategist at Rabobank in London.

“Comments from S&P imply that it is absolutely crucial for South Africa to accelerate the pace of implementing structural reforms to avoid a downgrade in the coming months,” Matys said in an emailed response to questions. Prolonged political “infighting may delay an implementation of reforms, which would increase the odds that S&P may downgrade South Africa to junk”, he said.

Political turmoil in Africa’s most-industrialised economy, including an investigation into Finance Minister Pravin Gordhan, has overshadowed the State’s efforts to boost investor and business confidence, such as recent proposals to stabilise the labour market. The slowest output growth this year since a 2009 recession will complicate Gordhan’s pledge to narrow the budget deficit to 2.5% of gross domestic product (GDP) by 2020, from a projected 3.4% this year, and to limit government debt.

S&P, which lowered South Africa’s local-currency rating to two levels above junk, said political events have distracted from growth-enhancing reforms and slow output growth continues to affect the nation’s fiscal performance and overall debt levels, and is a ratings weakness. While government has identified important reforms and supply bottlenecks in the economy, “delivery has been piecemeal”, the company said.

S&P gave South Africa the benefit of the doubt, Peter Attard Montalto, a London-based economist at Nomura International, said in an emailed note. “This can’t continue forever and the downgrade of the local-currency rating is a crystallised view of increasing risk in the eyes of S&P” from politics, the poor growth outlook and the slow implementation of reforms, he said.

Gordhan, 67, has been leading efforts to avoid a downgrade to junk with meetings between government, business and labour and by talking to foreign investors. However, a standoff between him and President Jacob Zuma over control of the National Treasury and State-owned companies, delays in passing new mining and antimoney laundering laws and a failed attempt by senior African National Congress officials last week to oust Zuma have fuelled perceptions of political turmoil and policy uncertainty.

The National Treasury recognises what needs to be done and is committed to implement the reforms needed, it said in a statement after S&P’s announcement. “We can celebrate for a few hours, come Monday, we must roll up our sleeves and get down to work and do what is necessary to make sure that come six months’ time we will not be panicking,” Lungisa Fuzile, the head of the National Treasury, said on December 2.

The economy will probably expand 0.4% this year and 1.2% in 2017, according to the central bank.

“The risk is still significant that we may see subinvestment grade on the foreign currency sometime during next year,” Ettienne le Roux, chief economist at Rand Merchant Bank in Johannesburg, said. “The key issue is the lack of GDP growth.”

Edited by Creamer Media Reporter

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