How long will it take SA to regain its investment grade?
Tandisizwe Mahlutshana, Executive at PPS Investments
Annabel Bishop, Chief Economist at Investec
Mark Mobius, Executive Chairman Templeton Emerging Markets Group, Singapore
In the wake of Jacob Zuma’s cabinet reshuffle, South Africa’s stability was questioned as markets reacted, the rand yo-yoed and a downgrade loomed on the horizon. With this, FAnews spoke to a few investors about the economic outlook, the investment landscape and what this means for South Africa.
The focus of the debate
According to Kevin Lings, Stanlib Chief Economist, “There is no doubt that S&P and Fitch made the final decision to downgrade South Africa’s international credit rating to below investment grade because of the leadership changes at National Treasury. Understandably, the Rand quickly went from being the best performing emerging market currency in the year up until 24 March to the worst performer since 24 March,” he said.
According to Tandisizwe Mahlutshana, Executive at PPS Investments, the reshuffle presents a material change to the South African investment landscape. “This is especially true given the concerns it raises around the independence of National Treasury and its ability to hold government to account for government expenditure and debt reduction,” said Mahlutshana.
Lings added, “The focus of the debate will now increasingly shift towards an assessment of government’s policy of radical socio-economic transformation and what that means for the household and business sectors. Under these circumstances, there is a real risk that confidence weakens and economic activity loses further momentum as political in-fighting takes centre stage.”
A difficult path to endure
“In addition, with a negative outlook placed on both ratings, S&P signalled that further downgrades were far from over,” said Annabel Bishop, Chief Economist at Investec.
The rand’s post-downgrade strength so far has reflected the global risk-on appetite and so significant purchases of emerging market local currency debt, with SA still attractive in this respect as the country retains its investment grade rating on its local currency debt” she said.
“The risk is for a local currency sub-investment credit rating downgrade - South Africa’s rand denominated sovereign debt issuance is around 90% and hard currency 10%. While the recent downgrades raised borrowing costs somewhat by negatively impacting investor confidence and so reduced the attractiveness of SA bonds at auction in that period, a local currency sub-investment grade sovereign credit rating would have substantially greater impact on government finances and its ease of funding” she pointed out.
“Under a local currency sub-investment grade rating the markedly higher borrowing costs would increase the cost of repaying government debt, and without a substantial and sustainable curtailment in government expenditure and rise in revenue, increase the chance of further credit rating downgrades. Upwards pressure would be placed on interest rates (weaker economic growth) and rand weakness (as investors lose confidence and sell SA portfolio assets) which would exacerbate the situation, reducing government’s capacity for expenditure, including existing social welfare grants” she said.
“South Africa's net debt has risen from 22% of GDP in 2008/09 to 46.0% of GDP in 2016/17, and is scheduled to rise to 48% of GDP in 2019/20. If government ignores the trend and fails to reign in mounting debt and return it closer to 40% of GDP then the rating agencies perceived credit worthiness of South Africa’s debt (SA's sovereign credit ratings) will likely fall further. As it is, it will likely take several years for South Africa to regain its investment grade country (hard currency) rating from S&P and Fitch,” she added.
S&P stated political risks will remain elevated this year, and policy shifts are likely, which could undermine fiscal and economic growth outcomes more than it currently projects.
FAnews ran a poll and asked readers how long they think it will take us to get out of junk status and the results were interesting. At the time, 32 people said it will take two years, 59 people said it will take 15 years and 22 people said it will take longer than 15 years. This is worrying indeed.
Mahlutshana said that clients’ portfolios should be positioned to capitalise on opportunities that present themselves under different economic and political circumstances.”
Lings added, “It is more important than ever that investors maintain a diversified portfolio that includes a sizeable holding of offshore assets. Being conservatively invested is an optimal strategy; at least until there is more policy certainty and the recent rating downgrade has been fully-priced into the financial markets.”
Light at the end of the tunnel
Lings concluded that, “It is worthwhile reflecting on the fact that many emerging market economies experience political turmoil from time-to-time and that foreign investors are relatively well acclimatised to these types of developments. This suggests that despite serious concerns about the recent cabinet reshuffle, foreign investors will continue to find opportunities in South Africa as they do in Brazil, South Korea, and Russia.”
“South Africa has been lacking any real growth drivers over the past year, and estimates for 2017 Gross Domestic Product (GDP) remain lackluster, albeit slightly better than in 2016. The International Monetary Fund is projecting growth of 0.8% this year, while the South African Treasury predicts growth of 1.3%,” said Mark Mobius, Executive Chairman Templeton Emerging Markets Group, Singapore.
“Despite all the political and economic challenges facing South Africa, the people’s desire for a better life with better education, strong domestic institutions, full employment opportunities and faster economic growth means that the future can be much brighter. The challenge now is to continue to pursue the economic and political conditions that will spread the wealth throughout the population and provide an example for the rest of Africa and the world,” concluded Mobius.
Editor’s Thoughts:
Only time will tell what truly awaits the South African investment landscape. After the dust settles, however, we question how long it will take South Africa to regain its investment grade. What are your thoughts? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za
