Cape Town – South Africa’s ability to regain investment-grade status will depend heavily on the response by those opposing President Jacob Zuma’s leadership, particularly from within the ruling ANC, said Sanisha Packirisamy from Momentum Investments in a company note.
Standard & Poor’s (S&P) Global Ratings on Monday downgraded South Africa’s sovereign credit rating to junk status, citing recent changes to the Cabinet which could bring policy continuity into question as one of the main reasons.
South Africa’s long-term foreign currency rating was changed from BBB- to BB+ (sub-investment or junk grade), while the long-term local currency rating was also dropped on notch from BBB to BBB- (at the lowest investment grade).
READ: S&P downgrades SA to junk status
S&P maintains its negative outlook, saying it reflects its view that political risks will continue to remain elevated in 2017.
The “wake-up call-scenario”
Packirisamy said in the event that the current political leadership is overhauled – either through a presidential recall or a vote of no confidence successfully passed in Parliament – a so-called “wake-up call”-scenario could take hold in South Africa.
“In such a scenario Momentum Investments expects South Africa to grow at around 1.8% in the next five years with economic activity steadily increasing towards 2.3% in the latter part of the forecast horizon,” she said.
Fiscally South Africa should remain on track in the wake-up call scenario with the fiscal deficit narrowing to 2.3% of GDP, but will depend on adherence to deficit-neutral spending and the implementation of bolder tax reforms to boost revenue growth.
This more favourable outcome could lead to a ratings reversal during the next five years,” Packirisamy said.
The “slippery slope-scenario”
There’s unfortunately also a high probability of a more adverse outcome, characterised by a prolonged period of heightened political uncertainty as political infighting within the ANC continues.
“[This could result] in policy paralysis and an inconclusive policy environment,” Packirisamy said.
In such a scenario government’s willingness to stabilise debt would likely “falter” and net government debt as a share of GDP is likely to peak at around 55%.
South Africa’s future as an investment-grade country depends largely on whether there’s a “positive” or “denialist” response from within the ANC and government.
What does a downgrade mean for South Africans?
Shawn Phillips from Glacier by Sanlam unpacked in a statement what exactly is in store for South Africa and its citizens following Monday’s S&P downgrade.
“The bottom line for our foreign currency debt being downgraded to ‘junk status’ is that it will cost South Africa more to borrow money in global markets. Currently, South Africa has a budget deficit and this deficit is funded through loans from large international bodies through the issuance of government bonds.
READ: What S&P downgrade means for SA
“Furthermore, South African consumers are highly indebted and continue to finance their lifestyles through debt. The cost of servicing this debt will become more expensive,” Phillips said.
SA facing economic, political and social crossroads
Rian le Roux, Old Mutual Investment Group Chief Executive, said in a statement the medium to longer term economic fallout resulting from the credit ratings downgrade is very uncertain.
“Should the present political situation persists or deteriorate, conditions could get much worse as the rand could slump severely with all the expected ramifications for inflation, interest rates and economic growth.”
READ: Downgrade: Our people will be worse off - CEOs
Le Roux said he has predicted for some time that the country was heading for a crossroads due to among other things weak implementation of economic reforms, lack of accountability, deepening corruption and an increasing political focus on self-enrichment.
“It is now in the hands of civil society and our political leaders to pull South Africa decisively away from that situation. If allowed to go unchecked, [it] could potentially turn [the country] into a full-blown, economic, political and social disaster,” Le Roux concluded.
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