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How SA can get back to investment grade

Jun 12 2017 07:00
Lameez Omarjee

Johannesburg – A new president is among the first steps South Africa has to take to become investment grade again, said an economist.

Fin24 spoke to several economists who shared on what it will take for the country to inch back towards investment grade.

Ratings agencies Fitch and Standard & Poor’s recently affirmed the country’s credit rating at BB+. Fitch changed its outlook to stable, and S&P affirmed the negative outlook.

On Friday ratings agency Moody’s downgraded both the local and foreign currency rating to Baa3 and maintained a negative outlook.

READ: Moody's downgrades SA's credit ratings

Although Moody’s rating is still one notch above junk status, the country is still at risk of being downgraded further if the economy does not recover from a recession, said Thabi Leoka, Argon Asset Management economist.

Among the things that could lead to an upgrade of the rating is more policy certainty, said Leoka. “Ratings agencies have mentioned policy uncertainties are impacting on growth… The political environment not conducive for an upgrade.”

Leoka emphasised the need for stronger relationships between government and business to stimulate growth.

New political leadership

“I think we need to change our president,” said Dr Azar Jammine, chief economist at Econometrix. Thereafter fundamental changes must be made to improve the economic growth rate, this starts with improving education, he said.

Jammine pointed out the importance of employers and workers cooperating, and that employers should do their bit to “uplift the plight” of the working class. This could be through the allocation of executive remuneration towards social projects.

Former deputy minister of finance Mcebisi Jonas, who delivered a keynote address at The Director’s Event on Friday, explained that a change in political leadership could help create the policy certainty and stability ratings agencies are seeking.

“A significant possibility we must put our eyes on … is what happens in December, leadership change in the ruling party.

"Hopefully, if it does happen it will bring necessary political and economic governance stability and policy certainty that we require. I say, if it will happen,” he said.

READ: Jonas: New political leadership needed to save economy

Geoff Blount, managing director of BayHill Capital, is of the view that investor confidence should be restored through state institutions, government accountability and “consistent, growth-appropriate” policy. Greater confidence will lead to more investment and boost economic growth, he said.

“Unfortunately, perceptions relating to all three factors are increasingly eroding at the moment, and are unlikely to reverse until the political impasse that the country finds itself in is resolved,” he said.

Faster growth

Faster economic growth, reforms of state-owned enterprises (SOEs) and reduced borrowing could help avoid further downgrades, said Annabel Bishop, Investec chief economist.

The downgrades in April, following the Cabinet reshuffle where President Jacob Zuma replaced former finance minister Pravin Gordhan with former home affairs Minister Malusi Gigaba, negatively affected investor confidence. This had a knock on effect on economic growth, Bishop explained in a report.

She added that political and economic policy uncertainties were weighing down sentiment. “At least 25% of GDP needs to be reinvested in the economy via fixed investment, particularly from government and utilities, not just the private sector,” she highlighted. In turn economic growth will stimulate further fixed investment, she explained.

Taking a historical view on government’s contribution to driving the economy, Bishop showed that having well managed, well financed and efficient SOEs which make a profit and contribute to the fiscus is needed.

“South Africa needs to reform governance in SOEs and increase public private sector partnerships, particularly improving the relationship between government and business,” she said.

The “noisy politics” have been recognised by ratings agencies as impacting confidence levels negatively and “trapping” South Africa in a low growth environment, said Sanisha Packirisamy, economist at Momentum Investments. Continued low growth and increasing government debt and contingent liabilities would trigger more negative ratings actions, she explained.

Momentum is of the view that the ratings outlook depends on government’s willingness and ability to rebuild the integrity of the state and key organs of the state, said Packirisamy. “South Africa has lost ground relative to its own history on a number of critical underlying indicators of governance, including political stability, government effectiveness and control of corruption,” she said.

Higher potential growth depends on the country’s ability to address governance matters, poor procurement practices and operational inefficiencies at SOEs. Higher growth also requires policy certainty to create conditions for investment, said Packirisamy.

A commitment to inclusive growth and social cohesion will also help address socio-economic pressures, eliminating the threat of populist policies, she explained. 

Green shoots

Despite the concerns ratings agencies have of the economy, there are positives, said Kevin Lings, chief economist at Stanlib. These include the improved trade balance, foreign investment flows, inflation within the target band between 3% and 6% and a more stable rand.

Lings explained that improving the credit rating should start with improving the growth rate. This is linked to improving investor confidence which requires policy clarity. Growth of 2% could see the country pick up needed tax revenue, this would also improve the fiscal position. Further improving the financial position at SOEs could present a “strong case” to upgrade South Africa.

However, ratings agencies are unlikely to upgrade the credit rating at the first sight of improvement. “They want to see improvement is sustainable.”

Ratings agencies are likely to change the outlook to positive first before upgrading the rating, once they are comfortable the improvement is sustainable, he said. 

READ: Treasury warns of more credit rating shocks as Moody’s downgrades SA

Following the downgrade by Moody’s Treasury issued a statement, warning that more downgrades could follow given the negative outlook assigned by the ratings agency.

“The urgent priority is reigniting confidence as well as reclaiming and maintaining the investment grade ratings,” said Treasury. “The commitment is on improving investor and consumer confidence through fast-tracking the implementation of the structural reforms on economic growth.”

Finance Minister Malusi Gigaba will continue to engage with business, labour and civil society. The minister will hold a press briefing on Monday to share the interventions by government to address the economic challenges. Treasury indicated these interventions would be within the budgetary framework.   

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fitch  |  moody's  |  s&p  |  jacob zuma  |  recession  |  credit downgrade  |  sa economy  |  policy

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