People are too negative – South Africa has a lot going for it: investors

 ·8 Jul 2016

Financial services and investment firm Capital International says that ‘pessimists’ are too negative about South Africa’s economic prospects – and that short-term positives in the country outweigh the negatives.

In a note issued on Friday, the group – based in Isle of Man – said that groups and individuals banking on the certainty that South Africa will be downgraded to junk status in December are being too negative.

The group is not blind to the challenges faced by South Africa, noting that the country faces declining GDP, many industries with declining production, rising interest rates, and ongoing drought conditions brought on by the el Nino.

On Thursday, the International Monetary Fund cut its 2016 growth forecast for South Africa to just 0.1% from the 0.6% seen in May. The Treasury’s own latest forecast is more optimistic at 0.9%.

Despite these factors, however, Capital International insisted that South Africa still had a lot going for it – “convincing positive factors” such as:

  • A first world infrastructure;
  • First world banking and financial institutions;
  • Good track record in fiscal management and financial discipline;
  • No default events (on bonds or loans) since 1983;
  • SA remains the gateway to Southern African countries;
  • More stability in the supply of electricity.

This more optimistic and positive view is shared by credit ratings firms – all of which gave South Africa reprieve from a ratings cut so far in 2016.

In its latest update, Moody’s noted that, even though South Africa faces many challenges – the latest being fallout from the recent Brexit vote, which is hitting the country harder than its emerging market counterparts – it still does not see the country entering into recession in 2016.

“It is clear that the credit rating process is an on-going assessment of the country that takes all factors into account and is forward looking. As SA is sitting on the knife edge it would not take some major new negative event to tip the rating into junk status,” Capital International said.

“All it would take is a further deterioration in economic growth or a continuation of the drought.”

“That said, the rating agencies forecasts are for growth to recover later this year and into 2017 and also for the drought to end. So we believe that the pessimists that assume a downgrade in December or early in 2017 is almost a certainty, are being too negative and that in the short term the positives outweigh the negatives.”

Election troubles

One area where CI deviates from other commentators is around the municipal elections to be held in August.

Ratings firms have said that political instability is one of the key factors that could impact South Africa’s rating assessment in December – while economists have warned that, in particular, ANC in-fighting could be the country’s downfall.

According to CI, a reduction of the ANC majority following the elections could result in pressure to grow the economy to reduce unemployment and to accelerate labour and structural reforms.

This optimistic view is not shared by analysts who have said in no uncertain terms that a poor showing for the ANC – or even the loss of a major metro like Tshwane – could see the party even more divided, and more violence erupt.

While ratings agencies have put faith in the SA government’s plans to bolster the economy, they remain reserved on the political situation, which may ultimately determine the country’s way forward post-August.

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