This is what a major ratings firm thinks about South Africa’s prospects for 2017
Following a tumultuous 2016, ratings agency S&P Global believes South Africa will continue to face mounting economic and political challenges.
Slower global growth and domestic weaknesses have dragged down economic growth, which has disappointed since 2014 at sub 2%, S&P Global said in its first sovereign
webcast of 2017, on Tuesday.
It noted that the rand’s exchange rate has been volatile, slumping against major currencies, with its relative global share in foreign exchange trading declining over the past three years. Meanwhile, the country’s fiscal financing needs-a key rating driver behind our long-term local currency rating-have mounted.
“However, the country has demonstrated signs of resilience. It has a large and active local currency fixed-income market, the authorities have committed themselves to gradual fiscal consolidation, and financial institutions have weathered the course. We hope to resolve the negative outlook on the long-term ratings this year,” S&P said.
The company affirmed the country’s rating at BBB-, one notch above junk, in December.
S&P Global provided transcripts from the webcast, which includes answers to the following four questions from investors and market participants.
What is your view of the current political tensions, potential leadership changes in the African National Congress, and the policy outlook?
Politics and policy positions are part of our institutional assessment in our ratings methodology. We like to see effectiveness, stability, and policy predictability in a sovereign’s policy making and political institutions.
In some cases, changes may bring uncertainties. Our experience with governments led by the African National Congress (ANC) since 1994 is that the party maintains broad political and institutional stability and policy continuity that has produced sustainable public finances.
Recently, however, we have seen rising political tensions, with infighting within the executive branch and with other arms of the state. We believe that if political tensions continue to escalate, they could derail the government from its efforts to improve policy implementation, hampering economic growth, potentially weakening the social contract with business and labor, and weighing on investor confidence and exchange rates.
What is the lowest GDP growth rate for 2017 and the highest level of debt to GDP that may result in a lowering of the ‘BBB-‘ long-term foreign currency rating?
We base our economic forecasts on a four-year projection and we use the average per capita trend to inform our analysis. Economic performance below our base case may result in a lowering of our ratings. Our base case is that
South Africa’s GDP growth rate bottomed at 0.5% in 2016 and we now expect 1.4% GDP growth in 2017, 1.8% in 2018, and 2.1% in 2019. Our growth forecasts depend on a combination of external and domestic factors: global growth and South Africa’s terms of trade which are linked to demand for commodities, especially from China.
Now that domestic bottlenecks such as electricity supply shortages, labor unrest, and the drought are almost over, agriculture can start to contribute more consistently to GDP growth. The mining and manufacturing sectors have also supported GDP growth.
These factors should help to take the economy onto a higher growth path, while the government gradually addresses broader regulatory uncertainty and the overall policy environment through economic reforms of the labor market and the mining sector.
We believe that a combination of net general government debt to GDP, plus exposures to non-financial public enterprises with weak balance sheets exceeding 60% of GDP, would weaken our view of fiscal flexibility.
What would the impact be of a sovereign downgrade to speculative grade on corporates and banks?
More generally, we can rate a corporate or bank above the sovereign only in specific circumstances where they pass stress tests guided by our “Ratings Above The Sovereign–Corporate And Government Ratings: Methodology And Assumptions”.
How do you assess fiscal space in South Africa?
South Africa’s fiscal space, or the flexibility its government has to increase its spending to boost the economy, is now limited. This follows an expansionary fiscal stance since 2009 that resulted in fiscal deficits averaging 4%, with net debt to GDP rising to 48% in 2017 from 30%.
The government has committed to a fiscal consolidation path with a view to reducing fiscal deficits below 3% from 2018 which would stabilize net general government debt to GDP at close to 50% in 2019. An expansionary fiscal stance would delay the government’s debt stabilization objective and further reduce fiscal flexibility.
We believe the government remains committed to fiscal consolidation despite weak economic growth constraining tax revenue targets. Fiscal space is limited because of rising risks from non-financial public enterprises that may require more extraordinary government support than we currently assume.
Eskom Holdings, is the biggest risk, as it benefits from a government guarantee framework of South African rand 350 billion (US$25 billion) or about 9% of 2016 GDP. Broader fiscal issues include placing public enterprises with weak balance sheets on financially sustainable trajectories and the implementation of governance reforms.
Lesetja Kganyago, Governor of the South African Reserve Bank said in a statement on Tuesday that the domestic growth outlook remains weak.
He said he expects growth to have averaged 0.4% in 2016, although recent monthly data for the fourth quarter suggest that there may be a downside risk to this forecast.
“The forecast for 2017 has been revised down marginally to 1.1%, and remains unchanged at 1.6% for 2018,” Kganyago said.
Read: Why credit ratings matter and why they can’t be ignored
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