SA's debt, growth woes could hamper return to investment grade

Durban – There’s never enough of a crisis in South Africa to force fundamental change that will spur growth or transformation and for that reason it will most likely take a long time for the country to claw its way back to investment grade, said Peter Attard Montalto, emerging market economist at Nomura. 

Speaking to Fin24 on the sidelines of the World Economic Forum on Africa which is currently taking place in Durban, Montalto said it is actually quite easy for countries to regain investment grade status – provided they “do the right thing”.

READ: SA's return to investment grade depends on ANC - analyst

Hungary for example was downgraded to junk status in January 2012, but returned to investment grade in September 2016. 

“But if you have a growth-related problem as South Africa does, which is not only linked to politics, but much deeper issues such as where the policy-making centre lies, then it can take a very long time,” Montalto said. 

Another factor that counts against South Africa is its increasing debt to GDP ratio. “If you can’t turn that around you can’t get back to investment grade.” 

Malusi Gigaba gets the benefit of the doubt 

Finance Minister Malusi Gigaba has made a number of appearances at this year’s WEF on Africa – after being in office for barely a month. 

Montalto said he gives Gigaba the “benefit of the doubt” for the time being, but that the real test will come when he delivers the medium-term budget policy framework (MTBPS) in October. 

READ: Economic change in SA: Gigaba has the answers 

“Fiscally we take a benign view and we don’t think anything particular is going to change (with Gigaba as Finance Minister).

“But what we’re waiting to see is when he’ll realise that he can’t keep on doing the same thing. There’s a fiscal and a growth shock to come and you’ll have to run twice as fast just to keep the existing fiscal profile.” 

Presidential aspirations? 

During a session with veteran journalist and WEF communications head Adrian Monck on Tuesday, Gigaba was asked whether he has any presidential aspirations in the ANC’s upcoming leadership election in December 2017. 

The Finance Minister side-stepped the question and explained that the ANC follows “certain processes” as a party. 

Montallto is of the view that Gigaba will most certainly harbour long-term aspirations to become president. “And he is the answer as to who the next generation of leaders are in South Africa. He is the only one who really comes up as a possibility.” 

Gigaba will however realise that as Finance Minister he wields immense power, Montalto said. 

“He probably has more direct power than even the president (Jacob Zuma) and he has the ability to do stuff – good and bad.” 

Market resilience

Asked about the surprising resilience in the rand and financial markets given Zuma’s far-reaching Cabinet reshuffle on March 31 and the subsequent credit rating downgrades by S&P Global and Fitch, Montalto cautioned that things will turn around for the worst in the months to come. 

South Africa is not in the same precarious position politically-speaking compared to countries such as Turkey, Russia or Brazil. 

READ: Inflation and current account numbers keep rand resilient - economist 

“That is what’s keeping markets in line. I think global risk is too much for people. They don’t want to be underweight and throw away their yield, but we will get there eventually.”