At our 2016 AGM, Konrad Reuss, S&P (Standard and Poor’s) MD and Regional Manager for Sub-Saharan Africa, spoke to us about the factors rating agencies consider when rating a country. Having Konrad as our guest speaker this year was well-timed as the next rating announcement is due on 2 December. Highlighting S&P’s global sovereign ratings of 132 countries, Konrad said that 21 countries have been downgraded from investment grade to speculative grade over the lifetime of the ratings and only 7 have made a comeback. Currently 52% of the countries are investment grade, while 48% are speculative. South Africa always draws strong views which makes it difficult to speculate the outcome of the December decision.
Currently, SA’s rating is a BBB- with a negative outlook. Looking at the factors that impact on South Africa’s rating, S&P rank SA as follows: institutional (neutral), economic (weak), external (neutral), fiscal – flexibility and performance (weak), fiscal – debt burden (neutral) and monetary assessments (strength). Essentially, our economic growth is too low and looking at this only, SA is not investment grade. SA recently dipped under the critical threshold of $5000 per capita. Looking at the fiscal flexibility, the issues impacting on South Africa include reduced tax revenue collections due to low GDP growth, rising exposure to SOEs with weak balance sheets, and rising debt servicing costs as risk premium and rates increase.
Another concern highlighted by Konrad is South Africa’s current account deficit. He said that the combination of a growing deficit in the context of a weak economy does not bode well and that we need to see a more aggressive reduction in this regard. We are currently spending more than we are producing and we must consider how that gap gets financed, as rating agencies and investors alike do not like seeing a weakening balance sheet.
Konrad said an additional concern in South Africa is our rising political tensions. The problem with the political leadership battles is that while the focus shifts to deal with the battle, policy implementation is delayed such as we see with the Mineral and Petroleum Resources Development Amendment bill. He added that extended strikes have lost SA a lot of goodwill. Konrad noted that it is tough to come back from non-investment grade, however he said that if a country responds appropriately and makes the necessary policy adjustments, some countries have come back within two – three years, though some never come back. Konrad used Brazil as a recent example – the country’s policy responses were not significant enough and thus, Brazil is going into a credit meltdown.
Konrad emphasised that the South African economy will not turn around overnight, but with strong political will, including reforms and public-private partnership, we can change our course and get back to a decent growth path. He concluded by saying that South Africa needs to decide what it wants and implement it, as well as strengthen governance and transparency.