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S&P downgrade reprieve gives SA Government, business and labour a window to make progress

06 June 2016 Old Mutual
Old Mutual Investment Group Chef Economist, Rian le Roux

Old Mutual Investment Group Chef Economist, Rian le Roux

Old Mutual Emerging Markets CEO, Ralph Mupita

Old Mutual Emerging Markets CEO, Ralph Mupita

The announcement by Standard & Poor’s Global Ratings (S&P) that it has maintained South Africa’s investment grade sovereign credit rating at BBB – the lowest investment grade rating that a country can be assigned – was a welcome reprieve for the country and gives Government, business and labour a window to collaborate in finding common ground to rebuild confidence in, as well as improve prospects for, the South African economy.

So says Old Mutual Investment Group Chief Economist Rian le Roux, who warns that, with another S&P ratings review due in December, SA is far from out of the woods.  All role players should take this opportunity to work together to not only avoid a downgrade in December, but ultimately, as a key next step, have the country’s negative outlook removed by getting the economy on a stronger footing.    

Of the six main factors that form the foundation of its ratings analyses, S&P  regards South Africa’s Achilles heels as Economic Assessment (weak economic growth and poor prospects) and Fiscal Flexibility and Performance (a constrained and/or deteriorating fiscal position). Poor performance on these two metrics was the main reason for South Africa’s ratings downgrade in June 2014 and, while the agency now appears a little less concerned about the fiscal outlook on account of government’s commitment to reduce the budget deficit over time, it remains deeply concerned about the growth outlook, warning that weak economic growth is putting SA’s economic metrics at risk and could eventually weaken government’s social contract with business and labour.     

Old Mutual Emerging Markets CEO Ralph Mupita says,  “Maintaining our investment grade rating, at least for now, is good news for South Africa as it gives Government, business and labour a window, albeit relatively short, to make real progress on how to structurally lift South Africa’s growth performance. Policy initiatives from Government and greater co-operation by all stakeholders in the interests of stronger inclusive economic growth are imperative.” 

In the review, S&P noted a list of positive developments and strengths that support the investment grade rating, including the improvement in the electricity situation, government’s commitment to fiscal consolidation, a history of conservative policy making, a strong democracy and an independent media.  However, it also lists a number of concerns, all, or a combination of which, could result in a downgrade.  “Key among these is weak growth, but the agency also warns against political interference that could weaken key institutions and lack of growth enhancing policy reforms,” says le Roux. 

In addition, the agency listed a number of reforms that could help improve economic growth, including measures to ensure a more stable labour environment and greater certainty regarding mining legislation.  More positively, the agency also noted that the conclusion of mining and labour reforms could engender a positive confidence shock.   

Le Roux believes that S&P will, of course, review the country’s situation in six months’ time, especially its progress regarding growth-enhancing policy reform and fiscal consolidation. “S&P’s decision does not mean that South Africa is off the hook. History has shown that it takes many years to regain a lost investment grade rating. Therefore all role players should not only focus on avoiding a further downgrade in December, but also on pull out all the stops over the next six months with the ultimate goal of removing the country’s negative outlook to get our rating on a stronger footing.“    

The rand, a barometer of confidence, firmed moderately following S&P’s decision, but is expected to remain volatile and relatively weak until ratings agencies and investors are convinced that South Africa’s longer-term prospects are taking a fundamental turn for the better. “Only then will greater Rand stability become a more realistic prospect”, says le Roux. 

“Still, we welcome the fact that a downgrade has been avoided as it might have resulted in a further, substantial weakening in the rand, more upward pressure on both inflation and interest rates and even a full-blown recession with widespread job losses,” he says. “This would have put significantly more pressure on already financially constrained consumers, especially the poor, who generally suffer the most under high inflation and job losses.”


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