Share

Heed the warning signs, economists urge govt

Cape Town – It’s of utmost importance that South Africa retains its foreign and local currency at investment grade, as the terms of government loans hinge on such a rating, said Elize Kruger of NKC African Economics. 

“With current debt servicing costs already close to R150bn - on debt of more than R2trn – a further increase in interest rates would be detrimental for South Africa’s fiscal position, as less money would be available to spend on other priorities,” Kruger added. 

READ: Debt service cost rises to close to R148bn 

On Friday, Standard & Poor’s (S&P) Global Ratings kept its assessment of South Africa’s foreign-currency debt at BBB-, one level above non-investment grade, with a negative outlook, although it cut the local-currency rating by one notch to BBB. 

S&P’s affirmation follows that of Fitch a week earlier, which also left South Africa’s foreign-currency assessment at one level above junk, and Moody’s Investors Service’s rating on two steps above sub-investment grade. 

'Heed the warning signs'

Sanisha Packirisamy, economist, and Herman van Papendorp, head of asset allocation at Momentum, said S&P has issued South Africa with a warning to prioritise growth in a politically-challenging environment by lowering the two-notch gap between SA’s local and foreign currency ratings. 

“S&P’s latest ratings action has left South Africa’s local credit rating at BBB, warning that a further reduction in fiscal flexibility, which is currently ranked as a weakness, could result in a further notch downgrade to the local rating."

READ: SA bets on bolstering growth to fight downgrades - Treasury

Although S&P left SA’s foreign currency rating unchanged at BBB- with a negative outlook, they noted that financing needs had surprised negatively, exceeding previous expectations, while a low GDP growth path has exacerbated the country’s economic per capita wealth and fiscal performance. 

“Moreover, S&P reiterated concerns highlighted by Moody’s and Fitch Ratings regarding the political situation in the country,” Packirisamy and Van Papendorp said. 

The global bank Citi said in a company note that S&P’s ratings decisions regarding the local and foreign currency was in line with its predictions and market expectations. 

Reasons for local currency downgrade

Citi said technically S&P downgraded the local currency rating for two main reasons: 

- rising financing needs of South Africa’s rand-denominated debt with government debt expected to reach 54% of GDP in 2019; and

- political uncertainty that has distracted government from implementing reform initiatives, while low GDP growth “haunts” fiscal performance and overall debt stock. 

“We believe that the local currency rating is at risk of further downgrading,” Citi said, adding that GDP growth outlook remains bleak. 

READ: S&P ratings: Treasury highlights 11 points

Citi is also of the view that reform initiatives in the country are unlikely to improve soon, as the ANC’s upcoming leadership election in 2017 may be a “powerful distraction” from bringing about the necessary reforms. 

2017 a crucial year

Raymond Parsons, economist at the North-West University’s School of Business and Governance, said the recent decisions by ratings agencies should be regarded as “friendly warnings” rather than “reprieves”. 

READ: S&P's ratings decision a partial victory, says Montalto

“South Africa now has the opportunity to make 2017 a crucial year and push the growth rate above 1% in 2017, and perhaps even to 2% in 2018.” 

Parsons added that the “invasive and corrosive” political and policy uncertainty which presently weighs down on economic performance should be reduced. “South Africa [should] welcome, rather than fear, future credit rating economic assessments,” he said. 

Meanwhile President Jacob Zuma has congratulated government, business, labour and all South Africans after three major credit rating agencies kept South Africa’s sovereign debt credit rating status above junk status.
 
“We congratulate Team South Africa, particularly government, business and labour for ensuring that the country’s sovereign debt credit rating status is not downgraded to junk status. Unity in action and hard work have paid off against a very volatile global economic climate.”

READ: Zuma laments politicising of ratings move

His comments came after he accused South Africans of “politicising” the ratings agencies move on South Africa’s sovereign credit rating.

In a question and answer session in Parliament late in November, Zuma said people tend to “pick and choose” what ratings agencies will “talk about”. 

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.94
-0.2%
Rand - Pound
23.91
-0.1%
Rand - Euro
20.43
+0.2%
Rand - Aus dollar
12.34
+0.1%
Rand - Yen
0.13
-0.2%
Platinum
910.50
+1.5%
Palladium
1,011.50
+1.0%
Gold
2,221.35
+1.2%
Silver
24.87
+0.9%
Brent Crude
86.09
-0.2%
Top 40
68,346
+1.0%
All Share
74,536
+0.8%
Resource 10
57,251
+2.8%
Industrial 25
103,936
+0.6%
Financial 15
16,502
-0.1%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders