Probability and Potential Impact of an Investment Ratings Downgrade

May 24, 2016
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As South Africa’s economy struggles, the probability of an investment ratings downgrade is a looming prospect being aggravated by a shaky political environment. Earlier this year, ratings agency S&P, warned that a further downgrade of our investment rating is inevitable. Sighting extremely low economic growth (likely 0.6% for 2016), the bailout of state-owned enterprises, large budget deficits and policy uncertainty as the issues.

Research also shows that when a country is downgraded that the reaction by policymakers is the key factor on how quickly the country will turn itself around. We discussed this at our recent Thought Leaders breakfast with Mike Brown, CEO of Nedbank, who provide the private sector view regarding the likelihood of a downgrade, and the Deputy Director-General of Treasury, Monale Ratsoma, who commented from government’s perspective, and highlighted the actions that Treasury is taking to avert a downgrade.

Mike Brown provided insights into South Africa’s current economic challenges and the view from rating agencies. He explained that economic growth, fiscal position, risk and institutional capacity are key pillars considered by sovereign ratings, highlighting that our low economic growth and risk profile are causes for concern. Shifting to the issue of employment, Mike noted that we are not growing jobs fast enough leading to implications for social stability. For the past five years, private sector employment has been falling, while public sector employment has been rising, but funded by private sector taxes which is unsustainable.

Fortunately, numerous initiatives are underway to boost investor confidence, catalyse employment in key sectors and drive reform, and earlier in 2016, business, government, and labour met to discuss solutions. Led by Pravin Gordhan and Jabu Mabuza (BUSA), the outcome was to focus on three work streams namely sovereign ratings, catalysing SME’s, and attracting investments into SA by focusing on key industries and SOE’s. Mike said that there has been enormous effort by government and business, however political manoeuvrings have been very damaging as they call into question the government’s commitment to fiscal consolidation and raise questions on the ability to deliver growth enhancing reform.

Monale Ratsoma of Treasury shared that while South Africa is getting some things right, we need to re-engineer and shift our economy. Our challenges include a volatile global environment, lower commodity prices, little room for fiscal or monetary stimulus, and low business and investor confidence. However, Treasury reforms prioritises jobs and growth by implementing the NDP and the 9 Point Plan. He highlighted some of their initiatives:

  • Removing constraints to growth: addressing high cross border costs such as the high port costs; focusing on increasing electricity supply; addressing slow regulatory processes; and tackling labour market constraints such as addressing production disruptions due to large scale strikes
  • Catalysing growth and employment: driving employment-intensive growth such as in agriculture and tourism; alleviating infrastructure constraints with a R865 billion investment; scaling up SMEs with an SME fund – R1bn committed by the private sector; and improving the ease of doing business
  • Encouraging investment: set up Invest SA (One-Stop Shop) to unblock regulatory bottlenecks; change restrictive immigration regulation; improve the quality of Socio-Economic Impact Assessment System; and improve cross-border transaction and removal of exchange controls over non-residents
  • Accelerating fiscal reform: ensure fiscal consolidation e. the expenditure ceiling remains in place since 2012; debt stabilisation; reprioritised funding away from non-essential goods and services in national departments; and improving efficiencies in the government procurement through centrally negotiated contracts and a new mandatory e-tender portal.

Presentation

 

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