Friday’s mixed credit rating reviews creates continued uncertainty: economists

Friday’s mixed credit rating reviews have resulted in continued uncertainty regarding the outlook for the country’s credit ratings for the next few months‚ economists say.

S&P downgraded their sovereign credit rating with a long-term foreign currency rating of “BB”‚ and a long-term local currency rating of “BB+”‚ with a “Stable Outlook” on Friday.

SA however received a reprieve from Moody’s‚ with the agency remaining the most generous of the big three credit rating agencies in being the only one to still rate both foreign- and local-currency South African government bonds as “investment grade”. However‚ it placed the country on review for a downgrade.

“Essentially‚ S&P has given up on South Africa being able to restore its fiscal strength and promote economic growth over the next few years‚ whereas Moody’s seems to have given government an urgent opportunity to undertake the structural reforms needed to promote higher economic growth and alleviate the fiscal deterioration‚” Econometrix chief economist Azar Jammine said on Monday.

Jammine said S&P had taken a view that irrespective of the ANC’s presidential election outcome‚ there were likely to be huge obstacles to undertake reforms that might improve economic growth.

Jammine said the ratings agencies have identified three problems besetting the country’s fiscal position.

The first is that projected growth in government revenue is just too low to accommodate a reduction in the budget deficit in the face of difficulty in reducing government expenditure due to social pressures.

The second is a concern about the possible liability for government emanating from poor corporate governance at state-owned enterprises.

The third is that economic growth remains unacceptably low and that‚ in such circumstances‚ fiscal consolidation requires dramatic intervention to curtail expenditure.

Jammine said Moody’s rating decision suggested if it saw sufficient action to address structural weaknesses in the economy being taken by a new leadership after the ANC conference‚ it might yet hold off a downgrade to junk.

“In this regard‚ the forthcoming February 2018 Budget is obviously perceived by the agency as being the litmus test of required action to improve the fiscal situation‚” Jammine said.

Economist Mike Schussler said government’s plans of reducing spending were realisable.

Schussler suggested that some of the savings could be achieved by slashing the huge salary bill of government employees and reducing the number of civil servants.

Schussler said Moody’s also took into account the upcoming ANC elective conference in December when it placed the country’s debt rating on review.

“They are hoping that there will be a moderate candidate who will make a good statement about the economy and who will show an intention to fix the economy‚” Schussler said.