Political decisions and credit ratings: a sad and good tale
As we approach the end of the year, we are now officially in the midst of the Festive Season. But will it be a season to be jolly? South Africa's crucial ratings decision was received with mixed views from economists.
Our own architect
If we look at the situation objectively, politicians have proved to be the architect of the country’s demise. Failing state owned enterprises, an over reliance on commodities, the devastating effects of the drought, continued corruption and a personal war between President Jacob Zuma and Finance Minister Pravin Gordhan had sent the alarm bells ringing in the rooms of credit ratings agencies.
While there is not a lot we can do about the drought, it is arguable that all of the other aspects mentioned above are avoidable evils with short to medium term solutions (barring the over reliance on commodities).
What effects do poor political decisions have on credit ratings? And what about smart political decisions, what effects do they have?
The Brexit situation
Arguably one of the most unpredictable decisions made during 2016 was the UK vote to leave the European Union (EU). The effects that this will have on Britons will only unravel over the next two years as the UK negotiates an exit strategy with the EU. While this may be the case, we are starting to see early signs of the impact now.
According to a report by the BBC, the UK has lost its top AAA credit rating from ratings agency Standards & Poor’s (S&P) following the country's Brexit vote. While this is nowhere near the trouble South Africa faces, it is a downgrade following poor political decisions.
S&P said the referendum result could lead to a deterioration of the UK's economic performance, including its large financial services sector.
Fellow credit ratings agency Fitch lowered its rating from AA+ to AA, forecasting an "abrupt slowdown" in growth in the short-term. On 24 June, Moody's cut the UK's credit rating outlook to negative.
Deep divisions
The report adds that Fitch expects an abrupt slowdown in UK growth in the short term.
But it also warned that medium term growth is likely to be weaker due to less favourable terms for exports to the EU, lower immigration and a reduction in foreign direct investment.
S&P also warned that it expected the UK economic growth to be hit by the outcome of the vote.
It said that there was a risk of a constitutional crisis if the referendum's outcome leads to a second referendum on Scottish independence from the UK.
Just think back on the political wrangling’s surrounding Jacob Zuma who has survived more than one vote of no confidence in 2016 alone.
Indian joy
Across the Indian Ocean, India is experiencing a period of massive growth, thanks largely to Prime Minister Narendra Modi’s policies.
It is a very unusual time to be in India. Not because markets are still trying to digest the possible implications of a Trump Presidency but due to the fact that travellers are currently travelling in India during possibly one of the most unorthodox, radical, if not downright brave, policy reforms in the country’s history – demonetisation.
On 8 November, the Prime Minister cancelled 86% of the currency in circulation overnight. Such was the secrecy of the move that it is rumoured just three people were in the know prior to implementation, and this in a country of nearly 1.3 billion people.
Hard hitter
In a release to the media, Jonathan Schiessl, Chief Investment Officer at Ashburton Investments, pointed out that the company was told that the shock is hitting discretionary expenditure hard, but more concern is focused on the lasting impact to real estate where the presence of black money is perhaps most evident.
“Our view remains it is simply too early to tell but life does seem to be very slowly getting back to normal in the everyday sense. The impact to property and other areas will become more evident after a few months. What is in no doubt to us however, is damaged sentiment. People have accepted that the move was a stunning masterstroke to hit the black economy but the inconvenience and uncertainly have left plenty of risk for Modi if the situation does not recover soon,” says Schiessl.
Editor’s Thoughts:
It is a tale of two cities. The question is…which path is South Africa likely to follow? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
