Ratings agencies will in all likelihood hold off on a sovereign ratings downgrade, as such a move could justify the removal of Finance Minister Pravin Gordhan.
This is the view of Gina Schoeman, South Africa economist of global bank Citi, who said in a company note issued on Monday that ratings agencies would not want to be seen as the “catalyst” of the removal of Gordhan.
“We are sure rating agencies are less tolerant now of political uncertainty than before. But for now, as long as the Finance Ministry remains as is, we suspect ratings agencies will remain uncomfortable being politicised.
“This means that the agencies may well suspect that a downgrade decision right now would justify the removal of Gordhan. This could further sway to postpone a downgrade decision to 2017 in our view,” Schoeman said.
Moody’s and Standard & Poor’s (S&P) will release their credit ratings reviews on 25 November and 2 December respectively, while Fitch is expected to follow suite in the near future, although no calendar dates have been provided yet.
The status quo
Moody’s investment grade of South Africa is at Baa2 for local and foreign currencies with a negative outlook. The rating is two notches above sub-investment (also referred to as junk) grade.
S&P has South Africa’s credit rating assigned as BBB+ (local currency) and BBB- (foreign currency) – one level above junk status with a negative outlook.
Fitch rates South Africa at BBB (local currency) and BBB- (foreign currency) – also one notch above sub-investment grade, but with a stable outlook.
Of the three ratings agencies, S&P has South Africa at the lowest credit rating and if S&P is to retain South Africa’s credit rating it has to meet four requirements:
- An upward GDP outlook: from 0.2% growth in 2016, South Africa’s GDP outlook in 2017 rises to 1% in 2017 and 1.7% in 2018. “It would be difficult to derail this upturn in outlook before the 2 December review,” Schoeman says.
- “Good enough” fiscal consolidation: Schoeman is of the view that the medium-term budget policy statement delivered on 26 October 2016 continues to consolidate the fiscal path with more spending cuts against a more realistic macroeconomic backdrop.
- Labour reform in the form of a secret strike ballot, at a minimum: Schoeman expects that labour reform in the form of a secret strike ballot is likely to be announced before S&P’s 2 December credit review. “[It’s] a relatively simple quick-fix reform that merely requires the buy-in of labour unions. For ratings agencies such a reform would display government’s political will to defy the growing, yet harmful power of trade unions in certain sectors.
- No substantial political flare-ups: if the Finance Ministry remains in place, ratings agencies wouldn’t want to be politicised, Schoeman says. “[They] may well suspect that a downgrade decision right now would justify the removal of Gordhan and they are not willing to be the catalyst thereof.”
Schoeman expects ratings agencies to be “somewhat indifferent” about the level at which South Africa’s national minimum wage will eventually be set.
Deputy President Cyril Ramaphosa on Sunday announced that the proposed minimum wage level will be R3 500 per month. This is however not final as the four constituencies of the National Economic Development and Labour Council (Nedlac) have different views – labour wants R4 000 to R4 500; business wants R1 800 to R2 000 and government was willing to settle at R2 500.
“As such, R3 500 doesn’t really seem to appease anyone,” Schoeman says.
She cautions, though, that if a national minimum wage of R3 500 would lead to substantial job losses next year, rating agencies could hold South Africa accountable at the time of the 2017 reviews.
If not now, then when?
Citi expects S&P to keep South Africa’s foreign currency rating unchanged on 2 December at BBB-. “However, we do expect the agency to send a warning signal in the form of a local currency downgrade to BBB (from BBB+ currently).
“We don’t expect much reaction from financial markets to a local currency downgrade, given that this rating would still be two notches above sub-investment grade,” Schoeman says.
A foreign currency rating downgrade in 2017, however, seems inevitable, as further reforms in the mining sector and state-owned enterprises would be necessary to ultimately avoid it.
Schoeman says although there are sections in government that seem keen on such reforms, it will be difficult to achieve it within the next 12 months. “Not only do such reforms take a long time to progress through the various channels of government and other bodies, such as labour and business, but this would need to progress during the 2017 ANC electoral cycle (when the ANC elects new national leaders) which we suspect would be distracting to policymakers.”
Citi therefore expects there’s a more than 50% chance that S&P could downgrade South Africa’s foreign currency rating to BB+ in 2017 – most likely during the June 2017 review period.