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The focus in South Africa is on debt levels, as ratings agencies have pushed the country further in junk status. Finance Minister Tito Mboweni called the move a painful one, as the downgrades will raise borrowing costs. Joining CNBC Africa to review the case of debt in Africa is Cobus van Staden, South African Institute of International Affairs.

Assessing debt sustainability in Africa

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Moody’s downgraded South Africa’s sovereign credit rating to junk status on Friday evening and this has left has left government concerned and trembling in its boots to what extent that this might have on the economy. The downgrade coupled with the COVID-19 fears is bringing much stress to the rand as well as the markets. Joining CNBC Africa to unpack it all is Rashaad Tayob, Fund Manager at Abax Investments and Jacques Celliers, CEO of FNB.

Moody’s downgrades SA to junk status – what does this mean for the economy?

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Fears of an economic catastrophe if Moody’s downgrades South Africa to junk status after the national budget are misplaced. This is according to Andrew Bahlmann, CEO of Deal Leaders Africa who says despite a potential downgrade, the wheels of the country&#8217;s economy will keep turning. He joins CNBC Africa for more.

Should SA have downgrade fears?

South Africa will use its annual budget next year to outline “decisive” policy to strengthen its fiscal framework, the finance ministry said on Saturday after S&amp;P Global Ratings cut its local currency debt to “junk” status.
<div id="attachment_116870" style="width: 690px" class="wp-caption aligncenter"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-116870" class="wp-image-116870 size-full" src="http://cnbc.africa/wp-content/uploads/2017/04/sp_500_ap1110091202421.jpg" alt="" width="680" height="440" />Credit rating agency Standard &amp; Poor&#8217;s. Picture: AFP</div>
“The 2018 Budget will outline decisive and specific policy measures to strengthen the fiscal framework,” the finance ministry said in a statement, without giving more detail.
S&amp;P announced the downgrade on Friday, citing a further deterioration in the country’s economic outlook and public finances, and Moody’s placed South Africa on review for a downgrade.
The downgrade by S&amp;P comes after Finance Minister Malusi Gigaba shocked markets on Oct. 25 by flagging sharply weaker growth expectations, a wider budget deficit and rising government debt.
The government has since appointed a judicial commission of inquiry into the causes of a 50 billion rand ($3.6 billion)revenue shortfall and to investigate a possible erosion into the nation’s revenue collection capability.
Economic growth has slowed to near zero in recent years and business and consumer sentiment have plumbed multi-decade lows as political uncertainty weighs on Africa’s most industrialised economy.
Infighting within the ruling African National Congress ahead of a conference in December to elect a successor to President Jacob Zuma as party chief has also sapped investor confidence.
“Restoring business and consumer confidence, and catalyzing inclusive growth is the top priority of government,” the finance ministry said.
($1 = 13.8716 rand)
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Reporting by TJ Strydom; editing by Alexander Smith
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South Africa to outline “decisive” policy in 2018 after debt rating cut

By Mike van der Westhuizen, Portfolio Manager, Citadel
During his 2017 Medium Term Budget Policy Statement (MTBPS), Finance Minister Malusi Gigaba, announced figures that surprised even the most bearish of forecasters. Although some fiscal slippage was widely expected, it was the frank transparency with which he delivered his speech that sent the market into panic. There were few positives for him to hide behind.
A tax shortfall of R50.8bn for the 2017/18 fiscal year would translate into a budget deficit of 4.3% of GDP, a 1.2 percentage point slippage on the figures announced in Pravin Gordhan’s last budget speech in February. With limited room to cut expenditure and little talk of additional revenue measures, for now funding this deficit will need to be done through the issuance of more government debt.
In the February Budget, Treasury had aimed to stabilise the debt to GDP ratio at 52.9% by the end of fiscal year 2018/19, but this was revised upwards significantly in the MTBPS to 59.7% in FY2020/21, with the acknowledgement that it could rise above 60% in 2022. Compare this to Moody’s and S&amp;P forecasts which had expected government debt ratios to peak at 53% and 54.9%, respectively over the medium term expenditure framework.
South Africa’s downgrading is no longer an “if” but a “when”. Both S&amp;P and Moody’s have reviews scheduled for 24 November and, while their recent rhetoric has pointed to a wait-and-see until after the ANC elective conference approach, it would not be surprising to see at least one of them pull the trigger sooner rather than later. However, more likely, we could see South Africa’s local currency bond rating be put on review for a downgrade on 24 November, in which case the rating agency has 60 to 90 days to make the move, a period which covers both the ANC elective conference and February 2018 budget. In any case, the negative outlook from the prior downgrade (S&amp;P on 3 April 2017 and Moody’s on 9 June 2017) needs to be resolved within 12 to 18 months, so a downgrade before the end of the first half of 2018 is inevitable.
As we head towards the December ANC elective conference the presidential race is wide open between the two front runners, Nkosazana Dlamini-Zuma (NDZ) and current deputy president Cyril Ramaphosa (CR17 as he has been dubbed). Without further clarity on who will next lead the ANC, the markets wait with bated breath. CR17 would be seen as the more market friendly candidate, while NDZ would be viewed as just an extension of the current president Zuma regime. With these two factions supposedly forming a rift in the ANC ranks, there is a slim chance that a compromise candidate could sneak in at the last minute.
Making a call on market reaction to either of the above two events is almost as difficult as predicting the outcomes of the events themselves. On the downgrade front, it can be argued that since the MTBPS the currency and bond markets have already priced in an imminent downgrade. Naturally the market could overreact to a confirmation that South Africa is officially sub-investment grade. In addition, if one was to factor in potential bond index exclusion from further downgrades, a large portion of the wall of money that has flowed into South Africa can just as quickly exit. This would almost certainly lead to further bond and currency weakness. On the other hand, we could see some short-term respite if the ratings agencies delay the fate.
On the political front, the market outcome could be seen as almost binary. A CR17 win could see a rally in the rand, bonds and SA facing equities, with arguably stronger reaction should the victory include a unified National Executive Committee (NEC). An NDZ win would spark the opposite, and it could be argued that the market has already priced in this status quo scenario to some extent.
Looking past the upcoming uncertainty, another wave of uncertainty will come unless bold steps are taken. The bottom line is that South Africa needs pro-growth economic policy that is ACTUALLY implemented and not just a regurgitation of a “wish list”. This would help to bolster the budget and the economy by sparking stronger revenue growth, purely from a resurgence in business and consumer confidence. Solve the low growth trap and a lot of other things fall into place. Regardless of what happens in late November and December, the road will remain bumpy until there is a unified ruling party. In the current politically sensitive landscape, real change looks unlikely for the time being.

South Africa’s downgrading is no longer an “if” but a “when” – Citadel

South Africa’s dire budget forecasts have raised the stakes ahead of S&amp;P Global’s and Moody’s Nov. 24 credit rating reviews of the junk grade-threatened country.
<div id="attachment_116870" style="width: 690px" class="wp-caption aligncenter"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-116870" class="wp-image-116870 size-full" src="http://cnbc.africa/wp-content/uploads/2017/04/sp_500_ap1110091202421.jpg" alt="" width="680" height="440" />Credit rating agency Standard &amp; Poor&#8217;s. Picture: AFP</div>
Both firms have reviews on the same day. If either cut their ‘local debt’ ratings, the government’s $125 billion stock of rand-denominated debt will no longer be eligible for the world’s big global bond indexes.
That would almost certainly trigger widespread selling and pile more pressure on the government by driving up its borrowing costs.
UBS estimated earlier this year that some $10 billion of South African bond holdings are indexed to Citi’s World Government Bond Index (WGBI), the biggest of the global benchmarks and tracked by an estimated $2-3 trillion of funds.
The downgrade concerns have been re-ignited after South Africa’s budget on Wednesday saw the Treasury hike its fiscal deficit forecast for this year to 4.3 percent of gross domestic product from 3.1 percent in April.
Finance Minister Malusi Gigaba cited shortfalls in revenues and costly bailouts to struggling state-owned companies. He also slashed growth estimates and said it was likely to stay under 2 percent for the next three years.
For the rating agencies the scale of the revisions were larger than expected but the directions weren‘t.
“We expected that Treasury would revise down their GDP forecasts for this year and next and so they have,” one of S&amp;P’s top sovereign analysts, Frank Gill, told Reuters, “along with large upward revisions to the deficit for the current fiscal year.”
Perhaps reassuringly in the short-term for the government he added: “Politics will probably trump the near-term macro-economic performance in South Africa particularly for the local currency rating.”
The biggest unknown Gill was referring to is the jostling ahead of the African National Congress (ANC) conference in December to elect a new party leader to succeed President Jacob Zuma.
Whoever the ANC picks is then likely to take over from Zuma as South Africa’s leader in 2019 when a national election is due.
Moody’s would not comment on Thursday on the impact of the budget.
Zuzana Brixiova, a Moody’s vice president, told Reuters in September that she wanted to hear just how the shortfall in revenues would be handled.
Fitch, which has already cut both South Africa’s local and foreign debt into the non-investment band, made its views clear though.
It said the budget signalled a shift by the Treasury away from commitments to cut deficits and debt and raised worries that there were no obvious plans to limit the damage to the economy.
South Africa’s rand extended losses on Thursday, falling to 11-month lows against the dollar while government bonds were also sharply weaker and Bank stocks fell 2.5 percent.
“The change in direction of policy making, away from a focus on fiscal consolidation that we anticipated as a consequence of March’s cabinet reshuffle, is under way and occurring faster than we had expected,” Fitch said in a statement.
“We think that divisions in the ANC will persist beyond the party’s electoral conference in December, and it is not clear that the political environment will become more conducive to consolidation.”
Fitch has not published the date of its next review of South Africa.
‘BAD NEWS’
Gigaba said it was difficult to say how rating agencies would react to his maiden medium-term budget. A treasury spokesman said Gigaba had spoken to the three main agencies by phone on Wednesday.
“We were announcing the bad news, we were opening up the books before the nation and saying we have got a difficult story to tell,” Gigaba told a breakfast briefing.
Analysts were becoming wary about whether the country’s bonds may be pushed out of widely used investment grade-only bond indexes.
“A downgrade and exclusion from the WGBI seems as though it is a foregone conclusion in the market,” Reezwana Sumad, chief analyst at Nedbank, said.
“Given an extremely bearish MTBPS report, we believe the risks of credit ratings downgrades before year-end have risen materially.”
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Additional reporting by Mfuneko Toyana in Johannesburg and Karin Strohecker in London; Writing by James Macharia; Editing by Jon Boyle and Hugh Lawson
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South Africa’s budget woes raise stakes for Nov. 24 rating reviews

South African deputy central bank governor Kuben Naidoo said on Tuesday domestic factors are the main cause of a frail economy and the risk of further credit downgrades is “quite significant”.
Painting a bleak picture during a monetary policy forum in Cape Town, Naidoo said a downgrade to South Africa’s local currency rating, which could see it fall out of crucial bond indices, could cost $8 to $12 billion in lost investment.
Fitch and S&amp;P Global Ratings both downgraded South Africa’s foreign-currency rating to speculative grade, or junk, following an abrupt cabinet reshuffle in March that saw the respected Pravin Gordhan axed as finance minister by President Jacob Zuma.
Africa’s most industrialized economy has been hampered by tensions within the ruling African National Congress and policy uncertainty that have sapped investor confidence and thwarted efforts to create jobs and reduce widespread poverty.
The government says it is striving to boost growth and find policies to boost employment.
Naidoo also cited the high levels of mistrust between the private and public sectors and South Africa’s powerful unions.
“We have a very weak economy and that is almost all due to domestic factors,” he said.“Global factors play some role, but those domestic factors include policy uncertainty, significant levels of mistrust between government, business and labour &#8230; and that certainly hobbled growth,” he said.
Among many spats between the state and private sector, the chamber of mines and the mining ministry are locked in a number of legal disputes over new regulations which industry says will throttle investment.
Naidoo said the economy would likely grow 0.6 or 0.7 percent in 2017 and inflation should remain within the 3 to 6 percent target range for the next two years.
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Writing by Ed Stoddard; Editing James Macharia and Matthew Mpoke Bigg
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South Africa’s economic woes domestic, downgrade risks high: deputy c.bank governor

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CNBC Africa spoke to Thomson Reuters&#8217; economist of the year winners Dr Johannes Jordaan, Chief Economist at Economic Modelling Solutions and Dennis Dykes, Chief Economist at Nedbank.

Johannes Jordaan, Dennis Dykes tops Reuters SA economist poll

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Earlier this week various experts gathered to discuss how best to manage the impact of the downgrades and the recession on the reputation profile of South Africa.

Experts meet to discuss how best to manage downgrades, recession

Ratings agency Moody&#8217;s Investors Service downgraded South Africa&#8217;s state-owned utility Eskom on Tuesday following the lowering of the country&#8217;s credit rating last week and said the outlook for the power company was negative.
Moody&#8217;s downgraded the long-term corporate family rating of Eskom and its zero coupon euro bonds to Ba2 from Ba1, leaving it two notches below investment grade. Eskom&#8217;s probability of default rating was also downgraded to Ba2-PD from Ba1-PD.
Moody&#8217;s downgraded South Africa&#8217;s credit rating on Friday but kept it at investment grade with a negative outlook, citing a recent cabinet reshuffle and reduced growth prospects for an economy mired in recession. [nL8N1J65Y7]
&#8220;Given Eskom&#8217;s strong linkage with the South African government and its high sensitivity to changes in the sovereign credit profile, the rating downgrades primarily reflect the one-notch downgrade of South Africa&#8217;s ratings to Baa3 negative,&#8221; Moody&#8217;s said in a statement.
&#8220;The negative outlook reflects the negative outlook on the government of South Africa,&#8221; it said.
(Reporting by Tanisha Heiberg; editing by David Clarke)
&nbsp;

Moody’s downgrades South Africa’s power utility Eskom

Mfuneko Toyana | JOHANNESBURG
South African bonds priced in a higher likelihood of a 50 basis point rate cut by the central bank sooner than anticipated after the economy unexpectedly slipped into recession and raised the risk of further credit downgrades.
Forward rate markets on Wednesday were pricing in a nearly 30 percent chance of a 50 basis point interest rate cut at the next policy meeting in July, up from a 9 percent probability seen before the May policy meeting.
The South African Reserve Bank (SARB) has treaded a cautious policy path in the last 18 months, keeping benchmark rates on hold at 7 percent while signalling it had reached the end of a tightening cycle that began in early 2014.
The bank may however be pushed to act to save the economy by cutting lending rates sooner than planned to make money cheaper in a bid to boost consumer spending, analysts said.
Data on Tuesday showed the economy contracted by 0.7 percent in the first quarter of 2017 after shrinking 0.3 percent in the fourth quarter of last year.
At its policy meeting in May, Reserve Bank Governor Lesetja Kganyago played down the prospects of cheaper borrowing costs, citing risks to inflation posed by currency volatility in light of domestic political uncertainty and credit ratings downgrades.
Economists also said risks to inflation and the currency, posed by large capital and trade deficits, had faded.
<blockquote>&#8220;For a whole host of reasons the prospect of a rate cut has definitely increased. The bank could very well prioritise growth, putting it higher than has been case where inflation has been front and centre,&#8221; said director ETM Analytics George Glynos.</blockquote>
&#8220;These traditional drags on the rand are no longer there and as a result they will probably feel a lot more comfortable in reducing interest rates.&#8221;
The country&#8217;s trade balance swung to a 11.4 billion rand surplus in March and has remained in the black since then, while the current account narrowed to a six-year low in the first quarter.
&#8220;Cutting next year would be too late and that will have driven the economy into a permanent recession,&#8221; said senior economist at Old Mutual Johann Els.
&#8220;Cutting rates now would potentially boost confidence and the growth outlook and that would be positive for rating expectations because the agencies have said they&#8217;re looking for growth possibilities that will aid fiscal sustainability.&#8221;
(Reporting by Mfuneko Toyana; editing by Mark Heinrich)
&nbsp;

Markets see South Africa cutting rates to boost growth

The city of Durban became Africa’s Davos last week as it hosted WEF Africa 2017, from the 3rd to the 5th of May. Sihle Zikalala‚ MEC for Economic Development‚ Tourism and Environmental Affairs in Kwazulu-Natal‚ had lobbied for the event to occur in Durban. It was estimated that the direct impact of hosting the event would be at least R64-million with a total impact of over R155-million.
With the majority of delegates arriving in Durban via OR Tambo airport, the city would have benefited more if it could have offered more direct flights.
The event was a great opportunity for Durban to rebrand itself after it was stripped of the hosting rights for the 2022 Commonwealth Games. It has acquired a new image, like a fresh coat of paint. It has also learned that mega events such as the Olympic Games and the Commonwealth Games are expensive to host, and divert spending from pressing social needs such as housing, healthcare, while demanding the building of additional infrastructure and superstructure.
In addition, the host country would be liable for cost overruns, which is a perennial reality of hosting mega event. South Africa had also learnt its lesson from the 2010 FIFA World Cup. The government has a high debt ratio, which was party impacted on by the huge expenditure to fund the 2010 FIFA World Cup.
The ratings agencies had expressed concern about the high debt that the state is carrying, which was one of the reasons that it downgraded South Africa. The legacy of the World Cup is evident in better roads infrastructure and world class stadia.
Besides using the 2010 World Cup as a marketing tool for investment and tourism, South Africa did not think carefully about what it sought to benefit from the event. These lessons are now part of our collective memory, which made it prudent for Durban to accept the decision to the stripped of the 2022 Commonwealth Games. South Africa was not about to give the Commonwealth a blank cheque.
The WEF Durban was hosted using existing infrastructure and it was a more sustainable event that the 2022 Commonwealth Games. The benefit came in the form of thousands of visitors who descended on the city, while the city was able to have a conversation about its investment opportunities.
In addition, the state and private sector had an opportunity to engage after the Cabinet reshuffle. The Cabinet reshuffle has hardened attitudes. It has accelerated what was dinner talk to the boardroom, raising the issue of corporate South Africa potentially having to disinvest from SA Inc. under the disguise of diversification.
The lack of trust and suspicion between the two has become a reality of the day. There is the allegation that the private sector would rather sit on R700 billion in their bank accounts that invest in their economy.
Labour instability in the post Marikana era has dampened investment, as labour unions have been reckless in demanding salaries that they don’t deserve. This led to retrenchments, but it is alleged that the union leadership couldn’t care less as they live a life of opulence and abundance.
The retrenchments have thrown millions of South Africans into a sea of poverty, unemployment and inequality. The state has failed to manage labour instability, and crime is too high – forcing businesses to spend a disproportionate amount of money on security, which should be the responsibility of the state.
Today, capital is concerned about the direction of our country, ranging from state capture to threats about property rights. The state is failing to address these issues, and instead the political rhetoric has taken a racist tone in the epithet White Monopoly Capital.
Those leading the rhetoric do not have the R700 billion to create thousands of jobs, that money is held within the private sector. Capital is a motive force that must be engaged to invest in our economy to create jobs and prosperity.
With jobs, our citizens would be able to fend for themselves and depend less on the state which has more than 17 million social grant dependents. Poverty is not a nice thing – it is a form of lifetime apartheid that deprives the human spirit of its huge potential.
I will only believe Radical Economic Transformation if it achieves what Dudley Seers wrote in The Meaning of Development: “The questions to ask about a country’s development are therefore: What is happening to poverty? What has been happening to unemployment? What has been happening to inequality? If all three of these have declined from high levels, then beyond doubt this has been a period of development’’.
Radical economic transformation must never result in radical economic irresponsibility. Restoring human dignity with jobs and a growing economy is the ultimate act of patriotism that must be dividend of democracy.
&nbsp;
Unathi Sonwabile Henama teaches tourism at the Tshwane University of Technology and writes in his personal capacity.

downgrades

Assessing debt sustainability in Africa

Moody’s downgrades SA to junk status – what does this mean for the economy?

Should SA have downgrade fears?

South Africa to outline “decisive” policy in 2018 after debt rating cut

South Africa’s downgrading is no longer an “if” but a “when” – Citadel

South Africa’s budget woes raise stakes for Nov. 24 rating reviews

South Africa’s economic woes domestic, downgrade risks high: deputy c.bank governor

Johannes Jordaan, Dennis Dykes tops Reuters SA economist poll

Experts meet to discuss how best to manage downgrades, recession

Moody’s downgrades South Africa’s power utility Eskom

Markets see South Africa cutting rates to boost growth

Op-Ed: On Durban, WEF Africa, and Radical Economic Transformation

News Tips

Advertise With Us

downgrades

Assessing debt sustainability in Africa

Moody’s downgrades SA to junk status – what does this mean for the economy?

Should SA have downgrade fears?

South Africa to outline “decisive” policy in 2018 after debt rating cut

South Africa’s downgrading is no longer an “if” but a “when” – Citadel

South Africa’s budget woes raise stakes for Nov. 24 rating reviews

South Africa’s economic woes domestic, downgrade risks high: deputy c.bank governor

Johannes Jordaan, Dennis Dykes tops Reuters SA economist poll

Experts meet to discuss how best to manage downgrades, recession

Moody’s downgrades South Africa’s power utility Eskom

Markets see South Africa cutting rates to boost growth

Op-Ed: On Durban, WEF Africa, and Radical Economic Transformation

News Tips

Advertise With Us

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