Johannesburg - The government will not rest on its laurels following a stunning boost from ratings agency Moody’s that defied gloomy local expectations, Finance Minister Pravin Gordhan said.
It will keep working to implement the plans it has been discussing with business and labour to turn around the economy.
Contrary to some predictions a downgrade was inevitable, Moody’s affirmed the country’s sovereign credit rating at Baa2, two notches into investment grade, saying, among other things, that recent developments on the political front – including the Constitutional Court judgment on Nkandla and High Court ruling on corruption charges against President Jacob Zuma – demonstrated the robustness of the country’s institutions.
The Moody’s decision comes as a ray of hope that, as it stated, “the country is likely approaching a turning point after several years of falling growth”.
It said various “supply-side shocks” that had hampered the economy were likely to recede.
“Specifically, the electricity supply is now more reliable, the drought is ending and the number of work days lost to strikes has shrunk.
“In addition, the inflation outlook is more subdued, which would suggest fewer interest rate rises ahead than we expected when the SA Reserve Bank saw inflation heading towards 8 percent by year end,” Moody’s said.
This would relieve the strain on the relatively highly indebted household sector and support growth.
It expected economic growth of just 0.5 percent this year, but saw it expanding by 1.5 percent next year.
The agency cited among positive signs the recent “rapprochement” between the government, business and labour and promised rationalisation of state-owned enterprises and labour market reform.
With Standard & Poor’s due to visit South Africa in just over a week, before announcing its decision in June, Gordhan said it remained “hard to tell” if the country had dodged the risk of a downgrade altogether.
Fitch and Standard & Poor’s have the country pegged one notch above junk status, leaving open the possibility of a “split rating” spanning investment and sub-investment grade, which might still oblige some institutional investors to put their funds elsewhere.
But Gordhan said it was up to the important stakeholders in the country to keep working to convince Standard & Poor’s the country was on the right track.
Gordhan said he was convinced if the plans being discussed with the private sector and the unions were translated into action, “we could place South Africa on a different trajectory in the near term”.
“The test for all of us is to convert our thoughts and plans into concrete actions that have a direct impact on inclusive growth, that reaffirm the government’s position in terms of controlling debt, and therefore expenditure, and continue to build investor confidence on the one hand, and undertake the reforms we need to take as well, all of which I’m sure we’ll talk about in the next few days.”
He said the tighter fiscal consolidation plans presented in the Budget, which had again shown the government’s ability to take tough fiscal decisions and stick to them, a pledge to return to a primary surplus within three years, confidence in plans to stabilise debt under 50 percent of GDP and the resilience shown by institutions like the Treasury and Reserve Bank, had all contributed to the positive outcome.
Asked why Moody’s had taken a different view to some of the more pessimistic predictions locally, he said people outside the country were used to seeing institutions like the judiciary and fiscal and monetary institutions coming under pressure in other parts of the world and that South Africa had fared well comparatively.
“That bodes well for ourselves in the medium to long term and gives us immense credibility internationally,” Gordhan said.
Moody’s said it saw the Constitutional Court judgment against the president over the misuse of public funds and Parliament for rejecting the ruling of the public protector and the High Court ruling to reinstate corruption-related charges against Zuma that were dropped prior to his taking office in 2009 as a demonstration of “the strength and independence of South Africa’s constitution and judicial system, and renewed attentiveness to bringing corruption out into the open and maintaining the rule of law”.
But Gordhan said avoiding a downgrade would only buy time of between six months and a year.
Moody’s, while affirming the country’s credit rating, assigned it a negative outlook on “implementation risks” relating to promised structural and legislative reforms and the possibility of GDP growth disappointing.
Gordhan said this required South Africa at least lay the basis for improved growth in the medium term, “arrest the deterioration in the government balance sheet, which we’ve started doing, arrest the decline in investor confidence, which we’ve also started doing, and increase the competitiveness of our economy”.
“I think if we get the dialogue we’ve been having to focus on some of these areas, it bodes well for team South Africa,” he said.
Political Bureau