The Ramaphosa factor behind S&P’s reprieve
However, the ratings agency warned against further weakening of the rule of law and urged protection of property rights and contracts
Just as the market expected, SA received another reprieve from S&P Global Ratings late on Friday night.
S&P kept the rand-denominated debt rating at BB+, the first notch of sub-investment grade, and the foreign currency rating at BB, two notches below investment grade.
The credit ratings agency said in a statement that “anaemic economic growth in 2018 and sizable contingent liabilities continue to weigh on SA’s fiscal prospects and debt burden”.
Despite this, it said, the government is pursuing a series of economic reforms that should help boost the economy from 2019, “despite structural impediments, chronic skills shortages, and high unemployment”.
SA plunged into recession for the first time since the global financial crisis in the first half of the year. While this will weigh on growth in 2018, S&P said government’s commitment to reforms and the economic stimulus package announced by President Cyril Ramaphosa at the end of September “will boost investor confidence, investment, and growth”.
The recession and higher-than-expected VAT refunds led to shortfalls in government revenues announced in the medium-term budget policy statement at the end of October.
Coupled with public-sector wage agreements and the weak balance sheets of key state-owned entities, this has put pressure on expenditure.
The ratings agency expects growth of 0.8% in 2018, above both the Treasury’s 0.7% and the Reserve Bank’s 0.6% forecasts.
Growth, however, will rebound to above 2% over 2019/2021, it said.
If the credit ratings agency sees continued fiscal deterioration, including higher expenditure pressures, a weaker economic performance or heightened external financing pressures, SA could descend further into junk status, which would increase the country’s cost of borrowing.
It also warned against the rule of law, property rights, or enforcement of contracts weakening significantly, which would undermine the investment and economic outlook.
However, if economic growth strengthens in a “significant and sustained manner” compared to projections, SA could see a ratings upgrade.
“S&P flagged the low growth as a major concern, but the tone of the statement was a little more encouraging,” Stanlib chief economist Kevin Lings said.
In response, the Treasury pledged reforms, and added that the government has all the policies it needed to turn the economy around in place.
“The decision affords SA a chance to demonstrate further concrete implementation of measures that are aimed at turning around the growth trajectory. These measures include the reprioritisation of public spending, the creation of the infrastructure fund as well as partnerships for growth,” said the Treasury.
The CEO Initiative, which is made up of key business representatives, said while there is work to be done before the country can see an improvement in the credit rating, there has not been further slippage into sub-investment territory which would make borrowing even more expensive.
S&P is one of two agencies that rate the country’s creditworthiness at sub-investment grade. It was the first to react when then president Jacob Zuma fired finance minister Pravin Gordhan in a cabinet reshuffle in March 2017. S&P and Fitch later cut SA’s foreign-currency bonds to junk status.