Although a vast amount has been written on the dash to junk over the last 6 months, especially over the last few weeks, we thought it valuable to our clients to provide a high level overview of the salient features of the Standard & Poor’s Ratings Agency’s (S&P) recent assessment of South Africa’s creditworthiness.
The assessment was less critical than many had expected, which is very encouraging. Instead, the tone was relatively well balanced, with S&P flagging both negative and positive factors. S&P is clearly impressed by national treasury’s intention and commitment to improving the country’s fiscal position.
The main considerations that S&P took into account in arriving at the assessment are summarised below:
Positive Comments
- Strong institutions like the Public Protector and the judiciary remain independent.
- A strong democracy with an independent media.
- The Reserve Bank remains independent & its policies credible.
- Only 10% of SA government debt is foreign currency denominated.
- New package of infrastructure projects will come online in the medium-term.
- Improved regulatory environment in metros to assist small and medium businesses.
- The current account deficit has narrowed due to the lower oil price and weak domestic demand.
Negative Comments
- Socio-economic dynamics of race and income inequality could shift policy towards intervention and income redistribution at the expense of growth.
- Low energy capacity, although this is improving.
- 35% of rand denominated government debt is owned by foreigners making SA vulnerable to negative investor sentiment, exchange rate fluctuations and rises in developed market interest rates.
- Budget deficits are financed by foreign investment flows making SA vulnerable to global risk appetite.
- State-owned public enterprises with weak balance sheets like SANRAL & SAA may require government financial aid.
- Inflexible labour laws and high youth unemployment impose structural economic weaknesses.
- SA is subject to weak growth due to weak global demand, a severe drought coupled with subdued mining and manufacturing output.
S&P made it clear that further economic and political reforms are required in order to lift the country’s growth rate and thereby avoiding a ratings downgrade to below Investment Grade. This means South Africa has another 6 months to show progress in implementing measures that will improve South Africa’s economic prospects.
Ultimately, the country remains precariously close to another ratings downgrade after S&P’s next review of South Africa’s credit rating in December.
The following key developments need tobe attended to:
- Provision of a reliable source of energy
- Labour Market Reform
- Clarity on the mining code
- Cohesion within the executive branch of government
- No political interference in independent institutions
- Net government debt plus government guarantees to financially weak government related entities must not surpass 60% of GDP. This means that the nuclear deal cannot proceed.
