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Cape Town - Without sufficient momentum on the structural reform agenda to benefit longer-term growth, SA faces the prospect of a downgrade to junk status by at least one of the main rating agencies by year-end, economists at Momentum warned on Tuesday.
Economist Sanisha Packirisamy and head of asset allocation Herman van Papendorp believe that in order to avoid a downgrade to junk by Standard and Poor's (S&P), labour market reforms, black economic empowerment and mining policies must be addressed to promote structural growth in the economy "so that SA can earn a spot among its investment-grade rated peers".
These reforms should include the prevention of prolonged and violent strikes and the implementation of a secret strike ballot to prevent worker intimidation, according to Packirisamy and Van Papendorp.
S&P currently has SA’s foreign debt rating on the lowest investment rung and has placed SA on a negative outlook.
READ: SA almost certain to face junk status by end of year - analyst
"Of the metrics that SA is scored against, we are most at risk of losing ground on the economic assessment score. A low growth environment will likely restrict SA’s ability to raise taxes or cut expenditure, leaving fiscal authorities with little wiggle room," said Packirisamy.
"Although S&P still scores SA as neutral on the institutional and governance effectiveness score, a highly polarised political landscape makes future policy responses difficult to predict and jeopardises the momentum of structural reform in the country."
Against a backdrop of a low growth trajectory, low policy predictability and continued vulnerability to commodity prices, she warned that SA remains at risk of losing its investment grade rating by year-end.
The SA Reserve Bank is, in her view, likely to react to slowing growth and rising inflation by hiking interest rates by a further two rounds of 25 basis points each, taking the repo rate to 7.5% over the next 12 months.
"In the absence of substantial foreign direct investment into SA, the country's still sizeable current account deficit will remain heavily reliant on higher real interest rates to attract foreign portfolio flows in a potential risk off environment where commodity prices are likely to remain under pressure," said Packirisamy.
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