Junk downgrade highlights risks to economy - report | Fin24

Junk downgrade highlights risks to economy - report

Apr 04 2017 12:09

Cape Town – S&P Global Ratings' decision late on Monday to slash South Africa’s sovereign credit rating to junk status has highlighted the major risks facing South Africa over the next decade, said Andrew Amoils, wealth analyst at New World Wealth.

READ: How will SA climb out of wealth trap?  

According to the latest wealth report on South Africa, published by global market research group New World Wealth, a number of factors can be regarded as significant risks in the country. 

Rising government debt, currently $161bn (51% of gross domestic product) up from $76bn (28% of GDP) in 2006, poses a huge risk to South Africa’s economic stability. “That’s an $85bn increase over the last 10 years,” Amoils said, “and the rise is mainly due to Eskom borrowing large amounts of money."

Poorly run state-owned entities – Eskom, SAA, the Post Office and Telkom (which is partly private) - are susceptible to corruption and inefficiency, according to Amoils. 

“These corporations are so heavily in debt and a drain on taxpayer funding. Some would even go so far as to describe them as a slush fund for people with government connections.” 

READ: S&P downgrades Eskom over financial risks 

Another big contributing factor to risk in South Africa is the high unemployment rate in the country, which exceeds 27%. “This is well above the emerging market average and the highest among the top 40 economies worldwide,” Amoils said. 

He ascribes it to a “relatively high degree of labour market rigidity” in the country as a result of a strong trade union presence. 

In addition, the drop in platinum prices also raises South Africa’s risk profile, placing strain on local platinum mines. “Platinum mines are one of the top providers of jobs in the country, so this is a major problem,” Amoils said.
Other factors that were highlighted in the Wealth Report were: 

  • a rising level of government regulation in the local business sector, which makes it “unnecessarily complicated” to start and run a business in South Africa;
  • high tax rates, which deter business formation; 
  • a rising number of strikes and labour action over the past few years, which has impacted heavily on sectors such as mining and utilities; and 
  • poorly-run municipal services, such as water, electricity, refuse collection and sewage as well as deteriorating transport infrastructure. 
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