Should South Africa\u2019s sovereign credit rating be downgraded due to an uncertain political climate, things will have taken a turn for the worst, said Gina Schoeman, South African economist for global bank Citi.<\/p>\n
Rating agencies have in the past months cited South Africa\u2019s stubbornly low gross domestic product figures, unfriendly labour environment, governance problems at state-owned enterprises (SOEs) and political uncertainty as main reasons for possible ratings downgrades.<\/p>\n
But since then things have become even more uncertain on the political front and if politics are the reason for a downgrade, such as the removal of Finance Minister Pravin Gordhan, we\u2019d be in a \u201cvery scary place\u201d, Schoeman suggested.<\/p>\n
Fitch and Standard & Poor\u2019s both have South Africa\u2019s credit outlook at BBB- with a negative outlook, one notch above junk status.<\/p>\n
In May, Moody\u2019s held South Africa\u2019s credit rating at Baa2 \u2013 two notches above junk, while keeping the outlook negative.<\/p>\n
Schoeman noted that a downgrade by one agency, such as S&P, would not be isolated and that other rating agencies would follow suit.<\/p>\n
She added that South Africa hasn\u2019t done itself \u201cany favours\u201d since the global economic fallout with the crises at SOEs, particularly Eskom with uncertainty about electricity supply.<\/p>\n
\u201cIf a country has electricity supply problems, investor sentiment starts to fall. But if you start layering on top of that a downgrade to sub-investment grade, mostly because it\u2019s coming off the lack of political will, that becomes a very scary place. Because not only will you see investors actually postpone capex expansion, but they\u2019ll actually start to reduce it.\u201d<\/p>\n
According to Schoeman, this trend has been noticeable over the past 12 months.<\/p>\n
\u201cIf you look at just the listed sector, most company deals have been offshore. Some of the biggest listed retailers have been expanding into developed markets because it doesn\u2019t come with as much risk as emerging markets, particularly South Africa.<\/p>\n
\u201cAnd if you look at the net negative foreign direct investments (FDI) we have in South Africa right now \u2013 we\u2019re actually attracting the same level of FDI inflows, but the problem is the level of FDI outflows has increased significantly. That shows that corporates that are based in South Africa \u2013 whether they are multi-nationals or domestic companies \u2013 are not willing to invest in the country.\u201d<\/p>\n
A downgrade to sub-investment grade \u2013 or junk \u2013 also means that certain companies may no longer invest in South Africa, Schoeman said.<\/p>\n
Analysts have cautioned in the past week that removing Gordhan as finance minister could spark an immediate credit ratings downgrade from a ratings agency, such as S&P.<\/p>\n
Had government done something like this a year ago, it wouldn\u2019t have elicited such a strong reaction, Schoeman said. But the unearthing of state capture and patronage in the last couple of months has changed the situation considerably.<\/p>\n
S&P sub-Saharan Africa MD Konrad Reuss told the Thomson Reuters Africa Summit on Thursday in Cape Town that \u201cpolitical tension and turmoil in South Africa has come to the fore\u201d.<\/p>\n
\u201cIt\u2019s a game changer from ten years ago,\u201d he said, adding that S&P in June for the first time felt obligated to highlight political risk and tension in South Africa.<\/p>\n
S&P is set to deliver its next credit ratings review on December 2.<\/p>\n
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