One of the biggest issues in South Africa in 2016 was the potential downgrade to junk status by global credit ratings agencies.While we avoided being downgraded twice last year (in June and November), there are significant fears that we will not be able to repeat the herculean efforts of last year.
Once again, we have to face two periods of a potential downgrade; one in June and one in November.
Speaking at the recent S&P Global Credit Conference, Gardner Rusike - Associate Director of Sovereign & IPF Ratings at S&P Global Ratings - said that the issues that South Africa face are the same as those faced in 2016.
"One of the biggest things we look for are wealth levels in the country. Over time, following the Global Financial Crisis (GFC), growth of the economy was under pressure which significantly affects wealth levels within the country," said Rusike.
While there are signs that economic growth within South Africa is increasing, its pace needs to accelerate significantly if global credit ratings agencies are to be kept at bay. This will decrease unemployment and will contain inflation.
The money bags are leaving
Following the release of the 2017 Budget, it was largely pointed out that South Africa can no longer borrow itself out of trouble. This reiterated by Rusike who added that foreign direct investment (FDI) would be our saving grace.
"South Africa is heavily dependent on imports, and exports have decreased significantly since the GFC. This means that there is a growing current account deficit which needs financing. We cannot do this while FDI is leaving the country," said Rusike.
This is still a very touchy subject, gross domestic product growth is still a major concern and there is still the issue of political uncertainty which is lingering in the market.
Key role player
One of the key role players when it comes to us avoiding a ratings downgrade is the performance of our state owned enterprises (SOE).
A significant issue that needs to be remembered when looking at the performance of SOEs is that they have both a financial commitment as well as a commitment to demand pressures. The last component is most important as most of our SOEs are effectively monopolies where they are the sole provider of a particular service.
Mashiyane Mabunda, Associate Corporate Ratings at S&P Global Ratings, pointed out that South African SOEs are particularly under pressure. "Two of the things we look for is the ability of an SOE to execute on a mandate that it maps out as well as its ability to draw back if a stated plan proves to be over ambitious, " said Mabunda.
This is a concerning issue in South Africa where we often learn that an SOE is in troubled water when the company is just about under water. However, Mabunda said that under performance will manifest itself on the SOE in question's balance sheet.
At the end of the day, we are at the mercies of our politicians and SOEs. There have been calls for FDI to be repatriated, but government cannot expect this if it cannot restore faith in its own actions. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts email@example.com.