South Africa faced a few defining moments in 2016. Some of the most defining of these was the ability of government to avoid two potential drops to junk status as the country faced tough economic conditions and declining political stability. This year also promises to bring its own challenges in this respect. All of the respected rating agencies have given South Africa negative outlooks, and with two periods of review to negate, we would be doing extraordinarily well to survive two periods of ratings review with the same level of political and market uncertainty.
survive two periods of ratings review with the same level of political and market uncertainty.
Unusual suspects
Before last year, the average South African never knew what junk status was. All of a sudden, we are acutely aware of our actions and how the country can be steered towards financial ruin with a few poor political decisions.
The average South African also never knew who was responsible for determining whether the country is sub-investment grade or not, now names such as Standard & Poor’s (S&P), Moodies and Fitch are mentioned at least twice a year.
But what are these ratings agencies saying about South Africa? A recent release by S&P detailing the ratings of Emerging Markets provides some insight into their thinking.
From the horse’s mouth
S&P provides a negative outlook for South Africa. The negative outlook reflects the potential adverse consequences of persistently low gross domestic product (GDP) growth on the public balance sheet in the next one to two years.
S&P reports that it could lower the ratings if GDP growth or the fiscal trajectory does not improve in line with our current expectations. For example, if South Africa enters a recession in 2017 or wealth levels continue to decline in US dollar terms, S&P could also lower the ratings if it believed that institutions had become weaker due to political interference affecting the government's policy framework.
Downward rating pressure would also mount if net general government debt and contingent liabilities related to financially weak government-related entities exceeded our current expectations. A reduction in fiscal flexibility may also lead us to further narrow the gap between the local and foreign currency ratings.
Areas of concern
This is concerning for two reasons. We have become perennial under achievers when it comes to economic growth. Forget the fact that the National Development Plan has set unrealistic growth targets given the industries we rely on for economic growth. The fact that we can’t even achieve a 2% growth rate is concerning.
Then there is political instability. We saw the start of a larger drama script last year when the African National Congress (ANC) lost key metros across the country as previously loyal supporters voted with their feet by taking votes away from them.
Silver lining
However, this dark cloud does have a silver lining. The recent rains have brought some welcome relief to the agricultural industry which is hopeful that the drought is finally over. We need agriculture to boost our economy at a time when commodities are not in high demand.
There is also some good news on the political front. President Jacob Zuma has said he won’t stand for the leadership of the ANC this year which means that his time as the nation’s most important decision maker will run its course come the 2019 general elections. There is strong support for Nkosazana Dlamini-Zuma and Cyril Ramaphosa, both of who can mend the fractures within the party as they are genuinely strong candidates. The ANC may be a wounded animal for now, this may not continue after the ANC election.
Establishing context
While South Africa’s economic worries are concerning, we need to look at it in context with what’s happening on a global landscape. South Africa is a key role player in BRICS. And its not as if Brazil, Russia and China are in any better shape than we are. Brazil even impeached its President last year following a sting of major scandals.
The only country within the BRICS block that is seemingly doing well is India. The world generally sees Indian Prime minister Narendra Modi as a shining light from a country that has had its own problems with corruption, and S&P agrees with this viewpoint.
S&P’s stable outlook balances India's sound external position and inclusive policymaking tradition against the vulnerabilities stemming from its low per capita income and weak public finances. The outlook indicates that S&P does not expect to change its rating on India this year or next, based on current set of forecasts.
Editor’s Thoughts:
What can we learn from India? This is what South Africa should focus on in 2017. How can we take the lessons India learned and apply them to our country? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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