Why SA not out of ratings wood yet - economist

Cape Town - There is a higher-than-even chance of a foreign rating downgrade by S&P to sub-investment grade by June 2017, in the view of Sanisha Packirisamy (economist) and Herman van Papendorp (head of investment research and asset allocation) at Momentum Investments.

"SA is not yet out of the woods regarding the foreign rating," cautioned Packirisamy.   

Continued growth in global economic activity, a reversal of the drought, increased domestic electricity supply and a greater resolve for faster fiscal consolidation may affirm SA’s foreign rating by S&P on December 2, but the ratings agency may send a strong signal to SA by lowering the two-notch gap that currently exists between SA’s local and foreign ratings, she explained.

"Before triggering a move on the foreign rating, S&P may want to have more clarity around fiscal issues and wait for the February 2017 national budget, while further information about the state of finances and governance in SA’s SOEs may arise over upcoming months," said Packirisamy.

"Potential growth remains muted and real gross domestic product (GDP) per capita growth will likely struggle to outpace population growth in SA over the next three years. Low economic growth continues to constrain SA’s economic assessment and rising political tensions are accentuating vulnerabilities."

Treasury has warned that a sub-investment grade status could translate into higher interest payments, a weaker rand, a higher cost of living, reduced fiscal space to address escalating spending pressures and subdued confidence ultimately translating into low investment and weak job creation.

Unfavourable fiscal response

"Unlike the unfavourable fiscal response triggered in Brazil following a rating downgrade to junk which led to a downgrade spiral, we expect a downgrade of the foreign rating into junk status to be treated with caution in SA. Government is likely to adhere to fiscal consolidation and trigger much-needed structural reforms in order to reverse the negative rating within the next five-year horizon," said Packirisamy.

"For SA to lose its spot in indices such as the Citi World Government Bond Index, the long-term domestic currency rating would need to be lowered into sub-investment grade by both Moody’s and S&P."

As such Packirisamy and Van Papendorp do not view this as an immediate concern for SA.

Even with an expected one-notch downgrade in the local currency rating by S&P, the local currency rating would still be two notches away from sub-investment grade on both Moody’s and S&P’s rankings, they say.

"Treasury acknowledges the need to adhere to the expenditure ceiling, implement tax measures, spend infrastructure funds efficiently, reduce waste and accelerate growth-enhancing reforms. Business is expected to play its role by helping to finance and mentor small businesses as well as assisting government and labour in tackling high unemployment," said Packirisamy.