Despite a local election outcome widely accepted to be progressive for the country, consumer and business confidence in South Africa remains deeply depressed. Against the current backdrop of a groundswell of discontent from civic, religious, opposition, union and ANC stalwart groups regarding the current political regime, alleged political interference in key South African institutions continues to threaten the country’s chances of keeping its sovereign rating above junk status.
This is according to Old Mutual Investment Group chief economist, Rian le Roux, who says that it remains to be seen whether enough has been done to once again escape a downgrade come December’s ratings agency decisions.
Le Roux explains that following S&P’s decision to leave South Africa’s sovereign rating unchanged in June, it commended South Africa’s commitment to fiscal consolidation over the medium term, but also listed a string of concerns, including a lack of growth-enhancing reforms, especially with regards to the labour market and the mining code.
“S&P specifically warned against political interference that could weaken key institutions,” he says. “The agency also expressed concerns over cohesion at the executive branch and went so far as to say that if these political tensions were to continue to fester, it could weigh more heavily on investor confidence. It added that the rating affirmation was based on the expectation that these political tensions would be held in check.”
Le Roux believes that maintaining our investment grade rating at mid-year was good news for South Africa as it gave government, business and labour a window, albeit a relatively short one, to make real progress on how to structurally lift South Africa’s growth performance. “Policy initiatives from government and greater co-operation by all stakeholders in the interests of stronger inclusive economic growth are imperative,” he insists.
However, confidence took another turn for the worse when the National Prosecuting Agency announced on 11 October that Minister Gordhan would be charged with fraud. This was quickly perceived as sealing the case for S&P downgrading South Africa to junk by year-end, with the other agencies possibly also acting on either actual rating or the outlook assessment of the existing rating. “Now that the case against the Finance Minister has been dropped, the question is whether the downgrade risk has lifted materially,” says Le Roux. “This is in addition to another positive development being the fairly well-received Medium Term Budget Policy Statement (MTBPS) in difficult macro-economic circumstances,” he adds.
In the most recent development in South Africa’s political arena, the Public Protector’s state capture report released yesterday, after a court ordered its release, has led to the rand strengthening significantly against the dollar. However, Le Roux says that it’s too soon to tell what kind of political and economic impact the contents of the report will have. “The bottom line is that the release order shows that mounting pressure against state capture, corruption and the patronage network is starting to yield results,” he explains.
S&P, together with the other rating agencies will review the country’s situation over the next few weeks. “While the dropped court case, good MTBPS and state capture report release are indeed positives, highlighting the strength of South Africa’s democratic institutions, lively voice of civil society and a firm commitment to fiscal consolidation, the dark cloud remains the relatively poor performance of the economy and lack of any real meaningful confidence-boosting policy measures being announced over the past few months,” he says. “As a result confidence remains depressed and the cyclical and structural outlook for the economy has not materially improved.”
Still, a downgrade (or downgrades) is by no means a given as there have been a few other positives too, Le Roux points out. “Importantly, the economy is cyclically adjusting, with inflation and interest rates peaking and the current account deficit narrowing; a widely feared debilitating wave of labour disruptions have not materialised; and the economy to date has managed to avoid a full-blown recession,” he says.
“Nevertheless, even if a downgrade/downgrades can again be avoided in December, South Africa’s investment grade rating can only be cemented over time by improved economic performance that reduces social and fiscal pressures.”
“History has shown that it takes many years to regain a lost investment grade rating,” he says. “Therefore all role players should not only focus on avoiding further downgrades as a matter of utmost urgency, but also aim to ultimately remove the country’s negative outlook to get our rating on a stronger footing.”