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Downgrade: can we buy ourselves enough time to turn the ship around?

24 November 2016 Arthur Kamp, Sanlam Investments
Arthur Kamp, Investment Economist at Sanlam Investments.

Arthur Kamp, Investment Economist at Sanlam Investments.

The next two Fridays are particularly important to South Africans. Moody’s will be announcing their findings on the state of affairs of SA state-owned entities (SOEs) on Friday, 25 November. And a week later Standard & Poor’s and Fitch will decide whether SA’s debt rating will be downgraded to non-investment status.

The figures have not improved

Investment economist Arthur Kamp says the quantitative factors the agencies look at include potential GDP growth, the trend in per capita income and government’s debt trajectory (including guarantees issued to state owned companies). These have not improved sufficiently since Standard & Poor’s (S&P) added a negative outlook to SA’s BBB- rating on its foreign currency debt. It is this rating which has received the most attention, since it is just one notch above investment grade (although Fitch also rates our foreign currency debt as BBB-, but with a stable outlook). In the case of S&P it’s important to distinguish between SA’s foreign currency and local currency debt ratings. The former speaks to our ability to repay our debt in foreign currency (only 10% of government’s total debt). S&P rates our domestic currency debt higher at BBB+.

In fact, projected debt and actual unemployment have worsened

Even though additional spending cuts and tax increases were announced in the October 2016 Medium Term Budget Policy Statement, the National Treasury revised upwards its projections for our debt ratio. And, given an unemployment rate of 27.1% the risk to government’s expenditure projections and hence fiscal sustainability is significant.

We urgently need GDP growth, but recent collaborations may have bought us more time

The problem is Standard and Poor’s “negative outlook” implies a high risk of a downgrade unless the ratings agency is satisfied sufficient improvements have been made to return government’s finances to a sustainable path. The Treasury has built an admirable track record in sticking to its expenditure targets in recent years and its intent to stabilise the debt ratio is clear. But, the fiscal maths do not work out if GDP growth does not lift. The shift towards improved co-operation between government, labour and business to address some of the policy uncertainty and constraints to growth in recent weeks may grant South Africa more time. But, that unfortunately would not imply we are out of the woods.

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