S&P warns what’s happening in SA more than just political noise

 ·14 Oct 2016

Any attempt to undermine South Africa’s key institutions like treasury would see the country likely downgraded to junk status, rating agency Standard & Poor’s (S&P) indicated on Thursday.

Without threatening a downgrade in a careful address, S&P sub-Saharan Africa MD Konrad Reuss told the Thomson Reuters Africa Summit in Cape Town on Thursday that any attempt to undermine South Africa’s institutions would be “a negative” for the agency.

Identifying key institutions like Treasury, the SA Reserve Bank and the courts, he said “any attempts to undermine these institutions will be a negative from the ratings agencies”.

S&P and Fitch Ratings both have South Africa’s credit rating at BBB- with a negative outlook, which is one notch above junk status. Moody’s rating is slightly better at Baa2 with a negative outlook.

S&P is set to deliver its next ratings review on December 2.

Reuss said South Africa’s most fundamental change that affects its credit rating focuses on how politics is threatening South Africa’s policies.

“What has (changed) … is that political tension and turmoil has come to the fore,” he said. “It is a game changer from South Africa 10 years ago.

“There is politics and then there are policies,” he said, explaining that in South Africa you could always rely on the policies.

“We are not in that situation now,” he said. “It is more than just political noise.”

Referring to S&P’s June review of SA, he said: “For the first time ever, we felt obliged to highlight political risk and tension. This is not about political noise. Here we have political tension that can undermine structural reforms that can become a serious risk to South Africa’s credit story.”

His latest economic outlook comes days after Finance Minister Pravin Gordhan’s fraud summons over the early retirement of former South African Revenue Service deputy commissioner Ivan Pillay.

It also comes a day before public protector Thuli Madonsela was set to release her report on state capture involving allegations that the Gupta family acted on behalf of President Jacob Zuma when they allegedly offered deputy finance minister Mcebisi Jonas the job of finance minister. Zuma’s office said on Thursday that it had obtained an interdict that prevented her from releasing the report.

Responding to the latest news regarding Zuma, Reuss said this “just highlights that the political risk has come to the fore more than ever”, adding that Gordhan’s fraud summons shows that “everything is not business as usual in this situation”.

Reuss said South Africa must sustain its current fiscal discipline and retain a team effort in its fast-tracked reform of state-owned enterprises (SOEs).

“It is critical at this juncture that the budget objectives from February are achieved,” he said.

“The minister and his team are targeting a faster and consolidated reform. It hinges on a team.”

Reuss also said S&P was keeping a close eye on economic growth in South Africa. The SA Reserve Bank sees the country growing by 0% in 2016 and S&P wants to see this change.

“We are focusing on growth,” he said. “Is it going to be lower again as expected? There is a risk if growth isn’t going to recover.”

What S&P said in June

In its June 3 review of the country, S&P said that its negative outlook reflects the potential adverse consequences of low growth and signals that it could lower its ratings on South Africa this year or next if policy measures do not turn the economy around.

“We could lower the ratings if GDP growth does not improve in line with our current expectations,” it said.

South Africa’s growth has stagnated in 2016, with the SA Reserve Bank expecting 0% growth for the year.

Credit ratings have a significant impact on South Africa as it impacts its borrowing costs. This is because ratings are used by sovereign wealth funds, pension funds as well as other investors to determine the credit worthiness of a country.

“Rising political tensions are accentuating vulnerabilities in the country’s sovereign credit profile,” it said in its June review.

“Political tensions have increased in South Africa since the removal of former Finance Minister Nhlanhla Nene on December 9, 2015, the Constitutional Court ruling against President Jacob Zuma on March 31, 2016 and periodic disputes between key government institutions and within the ANC.

“We believe that these political factors – if they continue to fester – could weigh more on investor confidence than inconclusive labour or mining sector reform.

“We base our rating affirmation on the expectation that they will be held in check, albeit in the context of political jockeying in the run-up to local government elections in August of this year and the ANC’s elective conference in December 2017.”


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