Can SA dodge a December credit rating downgrade?

STEVEN GRUZD

S&P, for instance, cited specific structural reforms needed to avoid a downgrade: reliable energy supply, labour market reform, clarity on the minerals regime and a reduction in political infighting.

Three factors all of these agencies are watching in South Africa are: fiscal consolidation, or the ability of government to contain public spending and reduce the budget deficit; management of state-owned enterprises (such as Eskom, SAA and the SABC) so that they do not require ever larger government bailouts; and economic growth.

Analysts concur that greater growth is the key ingredient.

Dr Azar Jammine, director and chief economist of Econometrix, believes Finance Minister Pravin Gordhan has a strong commitment to the first, the second is currently uncertain, and the biggest problem is the third. He says growth is undermined by “the ideological economic divide between market-oriented and socialist solutions”.

Dr Iraj Abedian, chief economist at Pan-African Investment and Research Services, agrees that Minister Gordhan, in his recent international roadshows with big business and organised labour, has bought some time.

“Now we must demonstrate what has been promised – good management of government finances, less corruption, better governance,” he says. “Pravin Gordhan has already put his foot down on a number of big expenditure items. The agencies will look closely in October at his Medium Term Budget Statement.

Equally, if not more importantly, we need to show a turnaround in growth performance… a humungous task at the best of times; currently the global economy is not in anyone’s favour.”

South Africa’s growth is not expected to reach two per cent in the next three years.

Raymond Goss, head of Wealth Management SA at Investec, sees avoiding a December downgrade as “a tall order based on an environment marked by economic headwinds and political own-goals”.

The first quarter GDP decline of 1,2 per cent, dragged down by mining and agriculture losses, “sets a sombre tone for the months ahead”. With low growth globally, commodities are unlikely to recover soon, he says.

David Shapiro, deputy chairman of Sasfin Securities, says: “Huge amounts of our tax go to paying for social grants. There is nothing left for growth.”

Shapiro also cites political tensions as a beleaguered ANC tries to hold onto power. The agencies will watch how August’s local government elections unfold. “Plus, strict labour laws are not helping business. And workers drop tools for anything. The drought could lift, but mining and manufacturing numbers are very worrying.

“We also can’t ignore the international picture – a global slowdown, ‘Brexit’ [the possibility of Britain leaving the EU] and the US elections.”

Both Goss and Shapiro highlight the Auditor-General’s report of over R25 billion lost to irregular, authorised and wasteful expenditure in 2015. Disturbingly, only 30 per cent of government entities received clean audits.

Shapiro says: “Politically, the ratings agencies are very reluctant to downgrade South Africa, especially because of its position on the continent.”

Abedian sees South Africa’s relative standing to other downgraded emerging economies like Brazil and Russia as more critical. “South Africa is miles ahead of Russia, for instance, in terms of protection of property, integrity of the courts, and the robustness of the political system, even with the shenanigans in parliament.”

Goss, however, believes the country can leverage “strong policy institutions, deep local capital markets and favourable government debt structures” and that government departments, beyond just Treasury, need to implement reforms rapidly to reverse the slide.

But Goss says that heading into the August polls, “the ANC appears to be moving in the exact opposite direction, defending the indefensible and sweeping issues such as state capture under the carpet. Given the dire economic consequences of losing our investment grade status, government may come to rue their short-sighted choices.”

What can ordinary taxpayers do? “Pay your taxes, so that government can reach its revenue targets more easily,” said Jammine. “Work harder. And try to get the unions to toyi-toyi less.”

Jammine feels “there’s a significant probability that we’ll be downgraded” by the end of this year. He also pointed out that the agencies have South Africa pegged at different levels (S&P Global has its outlook as “negative”, Fitch’s is “stable” and Moody’s has the country two notches above sub-investment). A downgrade by all three will be serious.

Shapiro says: “We shouldn’t be celebrating – we have to use this reprieve to change what’s wrong with our economy. And maybe a downgrade will be the best thing, a wakeup call, like the klap the Springboks got against the Irish.”