Decisions made by major rating agencies come and go. The more they change, the more they stay the same. Standard &amp; Poor’s has been the latest credit bureau to cut South Africa some slack, in not cutting the sovereign to a non-investment grade. Similar leniency has been shown by Fitch and Moody’s over the past 12 months. In the following year, they may however not be that patient, demanding more tangible progress with reforming the labor market, political cohesion and overcoming the challenges that poorly managed state-owned enterprises (SOEs) pose to economic growth.
Admittedly, no one likes being told what to do. That applies to decision makers in the public sector as well as in the private sector. South Africa continues to flirt with the makings of a recession, where another slip on the credit rating ladder could open up the possibility of borrowing funds from the International Monetary Fund (IMF). While this conjures up images of a bailout, it may not necessarily be as bad as it sounds. Loans come with prescribed conditions to them. The biggest will be boosting GDP growth to a more respectable level, from the lethargic level of 1% it appears destined to grow by over the next few years. The détente that was brokered this year between the government and leaders in the private sector, to halt a further slide in the country’s rating, is significant. It shows the two sides being poles apart on many things, but that the success of the economy is not the preserve of only one side.
Public-private partnerships (PPP) have emerged as a credible tool in meeting infrastructural development challenges, by harnessing the strengths of the private sector and government. The private sector provides technical know-how, management and finance for any key infrastructure project. The public sector offers security for private sector investment and also guides the PPP process through a legal and regulatory framework. A special purpose vehicle is established by the private sector, which raises a combination of debt and equity to finance the project. This structure is particularly important for SOEs; the financier will look more at this structure than it will at the cash-strapped public entity.
This framework is internationally recognized and respected. It encompasses a spending program of more than $58 billion, stretching over the following three fiscal years. Much success has already been seen with Africa’s largest PPP project –the Gautrain Rapid Rail Link, which came in around $1.7 billion. Renewable energy projects have also been successful.
However, the Infrascope project, financed by the World Bank to investigate how prepared and willing 15 African countries were to implement key PPPs, found that the process had challenges. Projects can be difficult to execute, legislative and regulatory processes can be tricky, and a high level of financial skill, sectoral knowledge and familiarity with the different structures which PPPs are needed. International investors also observe that bids have a large element of non-price factors, such as the promotion of black economic empowerment, job creation, socio-economic development and industrialization. Foreign bidders say that these local factors are too demanding and play a larger role than they should. Local stakeholders, such as trade unions, are also skeptical of PPPs, mistaking them for privatization of government assets and wary of the job losses which could accompany such projects.
It is not enough that South Africa’s GDP is growing by less than 1%, nor is it enough that reforms in the labor market have been insufficient to dent a 27.1% unemployment rate. It is also not sustainable that around half of South Africa’s population receives some form of welfare and dependency benefits.
How long it takes to rebuild the economy is difficult to say. It will take at least as long as the 33 consecutive months at which the annualized rate at which the South African Reserve Bank’s leading indicator has contracted.
Amid all the uncertainty, the one mantra which remains steadfast is that politics leads economics.

An Uneasy Partnership  That may be necessary

What happens when the world’s mighty ratings agencies downgrade your country to a non-investment grade, the dreaded so-called junk status?
High interest rates, slow growth, capital flight and inflation are some of the problems that come with a downgrade; in short, everyone from a street vendor to a corporate executive will feel the pinch.
So how does a downgrade happen?
“Ratings agencies analyse a sovereign’s performance over past economic and political cycles, as well as factors that indicate greater or lesser economic flexibility in future economic cycles, to determine the country’s creditworthiness,” says Gardner Rusike, Sovereign Credit Analyst at Standard &amp; Poor’s, one of the three big agencies.
“Sovereign ratings can improve when a ratings agency takes a forward looking opinion that an individual country has a willingness and ability to service its debt on time and in full.”
Ratings agencies, Standard &amp; Poor’s (S&amp;P) and Fitch have South Africa at BBB–, a notch above sub-investment grade, while Moody’s has the country two notches above.
Most economists say, for South Africa, junk status is a when and not an if. But for now finance minister, Pravin Gordhan, says the country is breathing thanks to Moody’s and its two notches.
“We live in a very volatile world and for us this is coupled by our own structural concerns. We should make the right noises, building consensus and confidence to attract investment from both South Africans and international investors,” he says.
Moody’s issuing South Africa’s Baa2 long-term government bond, in May, says the first driver for the confirmation was the agency’s expectation that South Africa’s economic growth will gradually strengthen after a trough this year, as the various supply-side shocks, that have suppressed economic activity since 2014, recede.
The other two agencies, Fitch and S&amp;P are expected to report on their ratings in June.
Professor Jannie Rossouw, Head of the School of Economic and Business Sciences at the University of the Witwatersrand, says junk status for South Africa was not necessarily inevitable.
“Politicians have a tendency to make reckless statements in an election year. As for South Africa, it matters what will happen in the forthcoming municipal elections and how the Independent Electoral Commission will conduct the August 3 municipal polls. We also need the right policies, such as on immigration, media freedoms, as investors require information to make investment decisions,” says Rossouw.
Hanns Spangenberg, Senior Economist at NKC African Economics, says while a drop to junk status could have significant implications for the South African debt market, much of the damage has already been done.
“In fact, according to our model, South African bonds (rated BBB-) are currently priced between a BB+ and a BB-rated bond (i.e. one to two notches lower than its actual rating). This indicates that a downgrade to junk status has already been priced in,” he says.
He says it may not be that bad.
“While a downgrade will probably have some effects, we do not anticipate massive capital outflows from South Africa if the country’s rating is downgraded to junk status, not as a direct result of the downgrade, and not significantly more than the emerging market sphere is already facing this year.”
Rossouw says South Africa needs decisive government action.
“There has been some actions from the government that could trigger ratings downgrade, this include the cabinet reshuffle of 9 December, 2015 (when the country had three finance ministers in four days). We can’t afford such irresponsible actions. Government should stick to its budget and should not borrow more than what is budgeted for.”
South Africa’s Deputy President, Cyril Ramaphosa, warns of hard times if there is a downgrade.
“South Africans have taken the bull by the horns and they are doing as much as possible to try to move the needle in the right direction. We should not be downgraded. We are very positive and robust, clearly we are doing as much as we can,” Ramaphosa told Eyewitness News.
If downgraded, South Africa will join Russia, Brazil, Bulgaria, Greece, Indonesia, and Turkey. It will mean these countries – facing economic headwinds and struggling to lure investment – will have a new competitor from the southernmost tip of Africa.

Tag: Agencies

FORBES AFRICA SOCIAL MEDIA

An Uneasy Partnership That may be necessary

The Junk Dunk