Johannesburg - A re-look at South Africa's ratings could be imminent, a prominent economist has cautioned.
Brait chief economist Colen Garrow says rating agencies generally make pronouncements on fiscal policy in the weeks after National Budgets are released.
The country's National Budget was tabled by Finance Minister Pravin Gordhan.
Garrow points out that in its political and economic outlook on South Africa in December 2008, S&P reaffirmed the country's BBB+ investment grade rating, but changed the outlook attached to this rating from stable to negative.
This suggested there were things it was not satisfied with.
"At the time, it flagged concern for the gaping deficit on the current account of the Balance of Payments, and the short-term portfolio flows used to finance it, but it nonetheless took comfort from prudent macroeconomic policies, a moderate debt burden and stable political institutions," Garrow says.
The agency also did not disapprove of fiscal deficits being "slightly higher than was projected", which it felt was not unwarranted in the downturn in the business cycle; it did also not project a major shift in economic policy to the left, Garrow adds.
"However, since then, S&P have become more cautious on the South African sovereign credit, reporting as recently as 19 January 2010, that 'downward pressure on the ratings could mount during 2010 if we were to observe signs that the authorities' commitment to prudent macroeconomic management was
weakening, or insufficient to reverse the rising trend of the government debt ratio over the medium term'.
Policy decisions
"With government guaranteeing more of Eskom's debt, S&P says it expects public debt to rise to '50% of GDP just beyond the forecast period'," Garrow points out.
But he says that if there is comfort South Africa can draw from S&P's downgrade this week of the Botswana sovereign, it is that its markets are more diversified than its neighbour's, which are overly dependent on diamonds.
"S&P downgraded Botswana to A- on deeper than expected weakening of public finances. It also noted concern over that government's expansionary fiscal policy. The assessment made on Botswana is important in a regional context.
"What agencies like S&P have to say influences not only South Africa's credit rating, but also the cost of any external debt. Sovereign ratings also influence decisions made by foreign investors, particularly those who wish to engage in the economy for the first time, and rely on independent political and economic assessments, before undertaking their own due diligence analyses," says Garrow.
But he notes that risk comes in with the negative outlook. "For instance, in the case of S&P, there is an eighteen month window, in which it must identify changes in South Africa's economic and political risk which will make it comfortable changing the outlook to 'stable'.
"Alternatively, if it is not satisfied that there have been improvements in policy, the risk is that the sovereign gets downgraded. Market response to this is obvious, as foreign portfolio managers realign their weightings of South African bonds and equities," Garrow points out.
South Africa's ratings are presently:
- Moody's A3 (stable outlook)
- S&P BBB+ (negative outlook)
- Fitch BBB+ (negative outlook)
- R and I A3 (negative outlook)
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