South Africa is out of second chances

The latest credit downgrades show that South Africa is long past the point where credit rating agencies will give the country the benefit of the doubt on growth reforms and fiscal consolidation, say economists at the Bureau for Economic Research (BER).

In a research note published on Monday (23 November), the BER said it is now time for the country deliver on promises before the agencies will start to consider changing their assessments on South Africa.

After the latest round of rating action, Fitch has overtaken S&P Global as the agency with the weakest rating outlook for South Africa. While these two agencies now both rate South Africa at three notches below investment grade, Fitch maintains a negative outlook on their rating.

“The bottom line from Fitch was that a history of under-delivery raised doubts about the speedy implementation of growth-enhancing structural reforms in South Africa,” the BER said.

“Even if implemented, Fitch argued that the reforms will have a limited impact. It is also likely to take time for the positive impacts to accumulate. We are less downbeat on the potential for reforms to contribute to shifting the needle on growth, but agree that the positive impact will only be seen over time.”

Moody’s highlighted much the same factors as Fitch, however the agency focused more on the lasting negative impact of Covid-19 on South Africa’s GDP growth and fiscal balances.

The agency expects the health crisis to intensify South Africa’s long-standing economic and social constraints, including amongst the highest levels of inequality in the world.

“For Moody’s, the concern is that this will hinder the implementation of reforms, posing further risks to medium-term growth,” the BER said.

“They argued that although South Africa is not unique in having been severely affected by the health pandemic, our capacity to mitigate the impacts of the unprecedented shock over the medium term is weaker than in many other countries.

“This is because of our notable pre-Covid fiscal, economic and social constraints, including rising borrowing costs. The negative rating outlook assigned by Moody’s reflects the risk that SA’s debt dynamics could turn out worse than they currently project.”

S&P Global, which has generally led the pack in lowering South Africa’s rating to below investment grade, kept its rating unchanged and also stuck to a stable outlook on the current ratings.

While S&P highlighted the same concerns as Fitch and Moody’s, it argued that the stable rating outlook was supported by the country’s credit strengths.

These include a credible central bank, a flexible exchange rate, and deep capital markets. These factors should help counterbalance low economic growth and fiscal pressures.

Track record 

One of the key points of concern is the public sector wage freeze which government has pencilled in for the next three years.

The proposal is contained in the Medium Term Budget Policy Statement (MTBPS) the Minister delivered in October. About R36.5 billion has been reduced from the compensation of employees, mainly from a freeze in salary increases.

However, the track record shows that the country is likely to capitulate to the demands of unions and workers meaning a wage freeze is unlikely to be successful, Jan Friederich, a senior director at Fitch Ratings told Bloomberg.

“If you look back at the past decade there have always been overruns in wage negotiations even when the offer from government was quite a bit more generous.

“Now, it’s a wage freeze in an environment where there is still some inflation – which is quite a drastic measure. A lot of the savings depend on it, and it is highly uncertain.”

Analysts and economists have long held doubts over government’s capacity to implement the wage freeze, saying that it has a poor track record of following through with stated budget cuts around the wage bill.

Mboweni responds

Finance minister Tito Mboweni criticised the ratings agencies for the downgrades, saying that it was like ‘beating (South Africa) while it was down’. This was particularly egregious during an global economic crisis, he said.

He described the downgrades as “painful” and said that the country needed to move with urgency to implement reforms to avoid further downgrades.

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South Africa is out of second chances