What are the SA’s chances of getting back from a downgrade?

Posted On Tuesday, 12 April 2016 10:33 Published by
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The consensus view is that it is now less a case of ‘if’ and rather a case of ‘when’ regarding the downgrade of South Africa’s credit rating to junk status by the global rating agencies.


This is according to Old Mutual Investment Group Chief Economist, Rian le Roux, who says that once this happens, SA’s current economic situation is going to make it even more challenging to claw its way back. This is based on the view that growth enhancing reforms will not be implemented speedily, the cyclically weak performance of the economy will not improve much over the next few years and mounting concerns over politics.

“While the improved prospects for the budget deficit are a positive in the short run, longer term fiscal consolidation and health requires faster economic growth,” explains le Roux.

“We believe that a downgrade might still be avoided through timely economic reforms and strong adherence to government’s intended spending control, but it should nevertheless be considered how challenging regaining our investment grade status will be once downgraded to junk, particularly when you consider our current economic position.”

Le Roux points out that two issues are currently of critical importance to the rating agencies in their decision to downgrade or not: narrowing the budget deficit, so stabilising government debt below 50% of GDP, and raising the growth rate of the economy structurally.

“A positive sign is that the agencies continue to value SA’s institutional strengths, characterised by things like an independent central bank, a strong National Treasury, a broadly healthy and well managed corporate sector, an independent judiciary, etcetera,” he says.

“However, while the latest tax revenue numbers and growing spending control have increased the budget deficit’s prospects for stabilisation in the shorter term, the structural growth outlook for the economy remains problematic.”

Raising the growth potential of the economy requires a speedy implementation of the National Development Plan (NDP) and close cooperation between Government, business, labour and civil society around the common vision of the NDP, according to le Roux.

“At the moment business confidence is deeply depressed, partly because of the economy struggling to grow, but largely because business sees little actual progress in NDP implementation and is therefore concerned over the ability of the economy to move onto a higher structural growth path over the medium term. 

“These concerns are aggravated by issues like corruption, patronage, concerns around state capture and more lately, even mounting concerns over social and political stability,” he says. 

Le Roux points out that once investment grade status is lost, you have to ‘over convince’ the agencies that you deserve to get it back. The average duration to regain investment grade is about eight years, although it has in the past actually differed significantly between countries. So, the bottom line and best advice is not to go there in the first place.

“Once downgraded, convincing the rating agencies of SA’s right to regain its investment grade status would prove to be particularly challenging unless SA implements economic reforms soon,” he says. 

“The biggest danger to SA over the medium term is that it fails to reform economically, growth consequently remains depressed, the fiscal situation remains under pressure – or worse, deteriorates further – and we eventually suffer a string of downgrades, which will leave our rating at junk for all the agencies.

Should this worst-case scenario come to be, the largest pitfall is that foreigners ‘give up’ on SA and sell their large holdings of SA financial assets through bonds and equities.” This could trigger a full blown currency slump and drive the economy into recession as inflation and interest rate surge. 

As a developing country with a shortage of savings SA needs to be an attractive investment destination, so we can attract foreign savings to assist with SA’s economic development. “The last thing SA can afford is to become a net exporter of capital,” says le Roux. “Stifling the private sector through policy uncertainty and excessive regulation is the surest way to achieve the bad outcome described above.” 

It is therefore believes that it is strongly advisable that SA must do all it can to avoid such an outcome as the odds are stacked against us when it comes to bouncing back from the abyss in a hurry. “Economic reforms remains SA’s major economic challenge and it should not be stifled by political in-fighting.”

Last modified on Tuesday, 12 April 2016 11:18

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