File picture: Alessandro Garofalo/Reuters
Johannesburg - It could take South Africa seven years to work its way back up into investment grade from its junk status, according to economists.

However, such an eventuality is solely dependent on the lengths policy makers and other key sectors of the economy are willing to go to ensure the country’s recovery.

Economists also say the recent downgrades of the country’s credit status to junk will certainly lead to an interest rate hike, and this could come as early as next month.

“South Africa is poorer today,” said the Banking Association of SA on Friday, following a second credit rating downgrade in a week.

The most recent was by Fitch, after Standard & Poor’s, which rated the country at BB+, a non-investment grade, later effecting the same on the banks.

Economists have warned that it would get even tighter over the coming months if the political situation in the country did not show any improvement.

They also forecast a decrease in spending by consumers, less business investment, no job creation opportunities, and in the longer term, the government’s inability to meet its revenue targets.

Peter Montalto, head of Emerging Europe, Middle East and Africa Economics at Nomura International, has warned of a 50 basis point interest rate hike next month, and the risk of recession.

“Our GDP growth forecast will drop to 0.2% from 1.1% previously. We also lower our 2018 GDP forecast to 0.7% from 1.5% previously, and 2019 from 1.7% to 1.0%, he said.

Already, the rand has depreciated and this, they say, will lead to a rise in inflation.

The government will also have to pay more in interest on money it borrows, leaving it with less money to spend on basic services such as water, electricity, education, welfare and other services.

“The only other source of revenue for government is taxes. In next year’s budget, expect taxes to go up”, Sygnia Asset Management’s Magda Wierzycka warned.

She said financial markets were certainly no longer expecting an interest rate cut as previously anticipated instead the SA Reserve Bank would be forced to hike interest rates.

“Instead of life getting better, things will get tighter.

“In this period of political uncertainty, make sure that you look after poorer people in your domestic employ. Their lives will become more impoverished”, Wierzycka said.

Many investment funds will also be unable to lend to the government by buying its bonds.

South Africa could be excluded from international bond indices which were tracked by many investors and this means that every investor “tracking” the index would sell our bonds.

She said international investors explicitly refused to invest in anything rated “junk”, hence they had already started disinvesting.

Wierzycka said in the current political situation foreign companies were unlikely to commit to investing in South Africa.

Hence economic growth will flatline, leading to no job creation.

About 48% of South Africa’s equity market and 36% of the rand-0denominated bond markets are owned by foreign investors.

“The investors care about risk as defined by a credit rating. If you look at those figures, that’s how much money could flow out of South Africa,” Wierzycka said.

The government will have to pay more in interest on any money it borrows and this means there is less money available for basic infrastructure spend, such as water, electricity, education.

In the past, the lack of service delivery led to violent protest action countrywide.

Senior economist at the University of Stellenbosch’s Business Economic Research Unit, Hugo Pienaar, said both the business and consumer confidence were at depressed levels and were expected to decline even further. “The rest of this year will remain volatile, but what happens before the ANC’s elective conference in December in terms of economic policy is difficult to say. But the country now needs an economic path that will grow the GDP,” Pienaar said.

Montalto said as a result of the volatile economic climate, the country would see a serious attempt to remove President Jacob Zuma.

“Ratings and markets could put increased pressure on the probability of Zumxit but has, in this global risk backdrop, shown insufficient cause for pressure on Zuma to step down.”

Even the planned no-confidence vote scheduled on April 1 would fail, he said.

Countries that have managed to recover from similar statuses have had to implement economic and fiscal reforms to reduce external vulnerability, said FNB macroeconomist Mamello Matikinca.

“This will be difficult for South Africa and will require concerted effort from government and business. Countries that have managed to do this have had to restructure or privatise state-owned entities and implement austerity measures,” she explained.

For now, though, civil society organisations and other interested parties have pleaded with the government to do all in its powers to rectify the situation.

“The agency believes the cabinet reshuffle will further undermine the investment climate.

Fitch forecasts GDP growth of 1.2% in 2017 and 2.1% in 2018, but the reshuffle has raised downside risks,” read Fitch’s review statement on Friday.

But Dr Azar Jammine, chief economist at Econometrix, said there was no talk of an increase in inflation or an increase in interest rates. He also said the impact of a downgrade was long term.

“On a more serious note and what we should be concerned about now, is that business confidence in South Africa will continue to decline as a result of the downgrades. Long-term interest rates are going to be effected and government will have to spend more. If Moody’s downgrades us, this will be the final blow and all confidence will be lost,” said Jammine.

If Moody’s downgraded the country, SA would lose its membership with the World Government Bond Index and R140billion would be at stake. Jammine said this would also result in the further fall of the rand.

Although it was not quick to pull the trigger, unlike Fitch and S&P, Matikinca said the negative review Moody’s had already issued suggested a downgrade was pending.

Roz Thomas of the CEO Initiative said it was now more crucial than ever South Africa maintained continuity with its fiscal plan and applied strict discipline in managing the country’s finances.

“Above all else, our country should not be drawn into borrowing even more money that would have to be repaid at higher rates of interest,” he said.

Chief executive of 10X Investment Steven Nathan said the causes of the country’s junk status review 20 years ago were different to the current untenable situation.

“We have leadership that is no more acting in the best interest of the country, so the ratings downgrade is really a vote of no confidence on policies.

“And what the ratings agencies are saying is that the leadership changes mean that, in the long run, we are going to see less responsible policies, possibly more corruption and a less productive South Africa,” Nathan said.

Matikinca also drew attention to the difference between the two periods explaining that the fiscal surplus recorded in the early 2000s, which came about as a result of a series of post-democracy gains, had contributed to South Africa’s rise above the junk status in the past.- Additional reporting by Nabeelah Shaikh

Political Bureau