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Another ratings reprieve for SA could be in store - economist

Cape Town – South Africa is likely to receive a reprieve from ratings agency Standard & Poor’s (S&P) on Friday 2 December, said Old Mutual Investment Group economist Rian le Roux. 

In a company note issued on Monday, Le Roux said the decision by Moody’s on Friday, 25 November 2016, to leave South Africa’s sovereign credit rating unchanged at two notches above junk status provides an extended window to rebuild confidence in the country and improve the economic prospects before the next ratings reviews in 2017. 

“Now there’s a better chance that S&P will also leave the rating unchanged this week. Fitch’s decision to keep SA’s sovereign rating unchanged at one level above non-investment grade, but changing the outlook from stable to negative, is an indication that a downgrade to non-investment grade is possible unless prospects for the economy improve materially, and underpins government’s intended longer-term fiscal consolidation,” Le Roux said. 

Longer-term risks remain  

Although South Africa’s ratings from Moody’s and Fitch remain at investment grade for now, the longer-term risk is still that, failing a material improvement in economic growth prospects through growth-enhancing structural reforms, the country could be subjected to multiple downgrades, said Le Roux. 

“Such an outcome could cause capital flight, a slump of the rand, an inflation surge and will leave the Reserve Bank with no choice but to raise interest rates further.  

“As agencies typically first change the outlook before actually changing the rating, the negative ratings from all three agencies imply that the urgency has increased for South Africa to get its economic and fiscal house in order,” Le Roux said. 

“The implication is that South Africa will need to work harder to implement structural reforms to restore confidence and encourage investment.”

READ: S&P warns what's happening in SA more than just political noise

In its review, Moody’s noted the strength of South African institutions that support the investment grade rating, citing the National Public Prosecutor’s decision to drop charges against Finance Minister Pravin Gordhan and the public protector’s State of Capture report as positive developments.  

However, it also lists a number of concerns, including political infighting, low growth and unemployment, which it believes pose the greatest risks to the South African economy.  
 
Le Roux says that the most significant risk in the short term remains whether or not S&P, which currently has South Africa at one level above junk status, will downgrade its sovereign rating to sub-investment grade.  

The positives 

“S&P might give South Africa another reprieve, as there have been a number of positive developments over the past few months, over and above the ones mentioned by Moody’s.  

Positives include strong and growing societal opposition to corruption and mismanagement in the public sector, a solid commitment to fiscal consolidation in the medium-term budget policy, a welcome lack of disruptive strike action, a much improved rainfall season, growing confidence that the economy is past the cyclical low, reduced upward pressure on local interest rates and a strong indication from government that corrective action at a number of state-owned enterprises has moved up the policy priority agenda, he said.

However, Le Roux believes that S&P could downgrade South Africa’s local credit rating – currently three levels above non-investment grade – on Friday due the rising interest burden of government debt and the fact that fiscal flexibility is still constrained. 

READ: SA on the bring of change, says Fuzile  

“The past six months have seen little in terms of policy reforms and this keeps the risk of an actual downgrade by S&P alive,” Le Roux said. 

“The recent announcement on the suggested minimum wage does create a bit more certainty about the issue, despite strong opposing views and further negotiations still to be conducted. 

“There have also been indications that announcements could soon be made on the mining charter and labour reforms, creating some more policy certainty, but the timing is uncertain and it is obviously still uncertain as to whether the nature of these reforms will satisfy the agency.

Another concern is the uncertainty around how S&P views SA’s institutional strength – currently sitting at a neutral rating. “If they change this to negative on account of the political tensions concerning the Finance Minister and concerns over the broad direction of economic policy, then they could downgrade us. However, we don’t believe at this stage that they will,” Le Roux said.

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