The big three credit rating agencies have now all cast their vote on South Africa and by the skin of its teeth, the country managed to run the gauntlet without any downgrades on its long-term government bonds.
A downgrade to a non-investment grade rating, or “junk status” – a point where large international funds would be forced to pull money out of South Africa – would have led to a weaker rand, slower growth and higher borrowing costs for government. Led by Finance Minister Pravin Gordhan, a team of leaders from government, business and labour pooled together to develop commitments of how to work together going forward and change the outlook of rating agencies and foreign investors.
It worked, but nothing is structurally different in South Africa, yet, and this is reflected in the caution voiced by the ratings agencies and the fragility of their rating decisions. Moody’s was the first to leave its Baa2 rating of South Africa (two levels above junk) unchanged on May 6, although it dropped its outlook from stable to negative. S&P Global Ratings followed on June 3, leaving both its BBB- rating (one level above junk) and its negative outlook unchanged, and on June 8 Fitch also held its rating of BBB- with a stable outlook.
The next series of reviews will take place around December and the country needs to decide whether it will maintain the status quo (which will likely lead to downgrades) or view this as rock bottom and do everything in its power to pull itself up. S&P clearly stated that its decision in June was likely to be a delay of a downgrade rather than a complete avoidance. Moody’s said that its decision was dependent on the promised reforms between business, labour and government.
Partnerships
The reforms discussed include more focus on public-private partnerships, especially in areas that provide capacity for growth such as power generation, transport and logistics, skills development and trade. They also include reforms to the labour law to increase the ease of business and boost employment, although progress in this area is likely to be slow.
The improvements in the stability of electricity supply were mentioned by all three ratings agencies as a positive influence on their decisions as this has a direct impact on growth. Eskom’s power supply has performed well this year, but until new capacity comes online the long-term stability of power is not guaranteed. Ratings agencies were encouraged by the success of the Independent Power Producers Programme, both due to the increased power supply and as an example of how public-private partnerships can work.
South Africa’s poor growth performance is a common concern among the rating agencies as low growth rates place a strain on government spending and the fiscal deficit, increasing the risk that government will not be able to service its debts. No policy will be able to substantially alter growth rates before the end of the year, but key changes to policy will at least show investors that government is serious about laying the groundwork now.
Pivotal in maintaining its rating is the strength and resilience of the country’s institutions, such as the Constitutional Court, Public Protector and National Prosecuting Authority. By staying transparent, independent and impartial, these limit the depth to which corruption can scuttle the economy. According to the ratings agencies, these institutions remain intact but are constantly under attack. Decisions such as those to stop the investigation into state capture are a major blow to the perception of independence of institutions.
S&P commended government for taking actions to reduce the fiscal deficit faster than expected. This needs to continue, but it needs to be the responsibility of all government departments and not solely led by Gordhan and the Treasury. Private businesses also have a role to play in conducting more responsible business so that they become an aid to the government, rather than a financial burden.
Just like the hype around climate change leads to solutions that help curb ecosystem destruction, policies and actions that stave off a credit downgrade will do more for South Africans than pander to the needs of ratings agencies. It is a focus point that should remain top priority.
* Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein.
* The views expressed here do not necessarily reflect those of Independent Media.
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