CEOs, analysts respond to S&P S.A rating

PUBLISHED: Fri, 02 Dec 2016 18:09:25 GMT
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The business community welcomes the decision by Standard & Poor’s to retain South Africa’s sovereign credit rating at its current level. This means South Africa’s long-term foreign currency debt is rated as investment grade by all three major rating agencies.

As we have stated before, this is a vindication of the efforts by government, labour and business over the past year to negotiate and undertake structural reforms to drive faster, more sustainable and more inclusive economic growth for the benefit of all South Africans.

All of the rating actions and opinions published recently are testament to the fact that the responsible management of the country’s budget and diligent commitment to fiscal consolidation will benefit South Africa’s growth significantly in the long term.

These announcements have affirmed investors’ conviction in the South African economy, but we see it as a beginning rather than an end of a process. We recognise that a lot of work is still necessary to reach higher levels of growth and we remain firmly committed to the structural reform programme, including initiatives undertaken by the CEO Initiative.

Working together in an unprecedented spirit of cooperation, government, labour and business have made a great deal of positive progress in a number of key areas.  We can be proud of the success achieved on a number of fronts. These include: 

  • An initiative to reduce youth unemployment, with the aim of providing employment to 1 million unemployed people (aged 18-29) over a period of three years. This is due to start by mid-2017.
  • A R1.5bn fund to invest in small- and medium enterprises, with the aim of stimulating growth and encouraging much needed job-creation in the SME sector. Disbursements are due to start in the first half of 2017.
  • Positive progress with regard to labour market reforms, with discussions on a national minimum wage and management of workplace conflict and strikes at an advanced stage.
  • The development of an Agricultural Growth Fund that would bring together the agricultural sector, the commercial banking sector, the Land Bank and Government in an endeavour to support both existing and new enterprises in the sector, and that would support farmers to continue producing through the current difficult drought conditions.
  • In the manufacturing sector, an initiative to revitalise the Vaal Triangle. The intention of the intervention is for industry in the area to work with Government to revitalise the area’s economy, including by reviving existing industry and seeking new opportunities for the area.
  • A partnership between business and Government in the tourism sector.  This partnership seeks to find ways that industry resources and capacity can be mobilised to support Government in critical areas related to tourism information, tourism safety and security and tourism marketing.   

The rating agencies have recognised the measures already implemented to reduce inefficiencies in the economy, and we will continue working on additional structural reforms to unlock the country’s full growth potential.

All the agencies recognised the importance of strong, independent institutions – including the South African Reserve Bank, the courts and the Public Protector – in a robust democracy such as South Africa’s. 

Peter Attard Montalto, economist, Nomura comment

As expected, one notch lower on the LC to BBB and the FC affirmed at BBB- with a negative outlook.

This is a partial victory for National Treasury push continually and hard on the rating agencies through every means available to them to avoid a downgrade to junk – dangling reforms in front of them, creating a positive mood music with business and labour.

Ultimately the saving graces for S&P were the stabilisation in the strike situation and of energy supply together with a firm short run commitment on the fiscal front. This all led to S&P giving benefit of the doubt to SA though their write up they are less explicit about this than say Moody’s was last week.

However this can’t continue forever and the downgrade of the local currency rating is a crystallised view of increasing risk in the eyes of S&P from politics, poor growth outlook, ‘piecemeal’ implementation of reforms. S&P also noted the long run fiscal and debt outlook is deteriorating faster than they had previous presumed. They remain very worried about the risks of increasing political noise and contestation in 2017 – saying specifically there was a risk the alters the direction of policy (which might be a coded reference too to a reshuffle). Contingent liabilities are still described as ‘limited’ but moving in a worrying direction of size and likelyhood of usage.

Overall the key parts of the negative outlook revolve around such low growth being a drag on the public balance sheet. As such they highlight reasons to downgrade as growth surprising to the downside, risks to institutions materialising, greater increase in contingent liabilities and net debt than expected and they (again) specifically highlight a further narrowing of the gap between FC and LC ratings is possible if they see a further reduction in fiscal flexibility.

A downgrade to the FC was possible today based on slippage to fiscal and growth metrics. It didn’t happen as benefit of the doubt was given and so they wait, basically, for more slippage before downgrading. That may well come after the budget but again it will always be marginal – never a huge shock (ok barring PGxit). As such we think ratings risks remains high in 2017 for S&P and Moody’s if net debt continues to creep higher and with what we think will be further downgrades to growth expectations and flattening of the growth recovery outlook.

Specifically timing a downgrade will be difficult. Ultimately SA is not a shock wham bham crisis country that jumps to junk. It is a slow grind of under performance – today seen in the one notch downgrade to the LC rating – but over time can also lead to a FC rating downgrade.

Whilst broadly expected somewhat of a relief rally may be possible in markets after this.

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