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Credit ratings: We’re in red-flag territory

‘Three strikes and you’re out’, they say. SA needs to take action now or face a third downgrade.

South Africa deserves a credit downgrade but there is still hope that the belief in the country shown by credit rating agency Moody’s will buy us a further reprieve, says senior Nedbank economist Nicky Weimar.

Moody’s is the only rating agency that has not downgraded South Africa’s bulging debt to junk status. It announced in March that it would delay its decision until after the May general elections. It currently has South Africa one notch above sub-investment grade.

Read: Latest GDP figures a credit negative for South African bank’s assets

Weimar said at the annual Nedgroup treasurer conference that the agency has enough reason to downgrade the country. “On the fundamentals we have earned a downgrade … I honestly believe we will be downgraded, just on the fundamentals.”

Thread of hope

However, she says Moody’s could offer President Cyril Ramaphosa more time to make the changes the South African economy desperately needs, given that he has only been in power with a true mandate for a couple of months.

The rating decision is expected in November. If Ramaphosa is given more time to start structural changes, it might become “less likely” that the country will get three strikes – Fitch and S&P have already downgraded SA to junk status.

Weimar says that if the South African Reserve Bank (Sarb) and its mandate are protected, individuals implicated in corruption are prosecuted, and the government deals decisively with state-owned enterprises, particularly Eskom, then we might avoid a downgrade.

“So this year is really the vulnerable time.”

She says the market has priced in a possible downgrade, and there might be an upside if there is some good news. However, the good news has been hard to find.

Hit on all fronts

The country was hit on all fronts in the first quarter of the year: the contraction of the economy by 3.2%, rise in unemployment, worst levels of load shedding since the electricity crisis in 2008 and, on top of that, global growth slowed and commodity prices went nowhere.

“The economy has literally been caught in this slow, unrelenting squeeze and we need to turn it around,” says Weimar. “We need to have a good look at what the sources of growth can be.”

The answer certainly does not lie in government spending for a major consumer boost, according to Weimar.

Government is simply in too frail a financial position to do anything.

The budget deficit has been over 3% for more than a decade and now sits at around 4%. The debt-to-GDP burden is in red-flag territory, she says.

An obvious driver of economic growth is fixed investment. Investors look at risk when seeking the best possible return on their investments.

Policy uncertainty and contradictory statements on key issues such as the Sarb’s mandate are undermining the country. Very few people have any idea what the country’s economic policies are simply because government has made sure they are vague.

Investors are therefore struggling to price the risk – and if they cannot price the risk, they will not invest. “If we really want to have [economic] revival from fixed investments, the country will have to get policy certainty.”

It is challenging to implement difficult structural changes in an environment of high unemployment and massive inequality, she adds.

Spectacular ‘achievement’

Nedbank Group CEO Mike Brown says the only thing SA is doing “spectacularly well in” is in our race to the top of the global unemployment statistics.

He says business [the private sector] is an obvious area for growth. Many have sufficient skills and strong cash balances. “However, in the absence of policy certainty we will either see a build-up of cash, an increase in share buybacks, or businesses looking at investment opportunities outside of SA.”

Brown notes that our economic policies are born out of the obvious factionalism that we see within the ruling party. On the one hand there is talk about ensuring investments that will drive growth and job creation, but on the other the rhetoric remains anti-business.

South Africa can only achieve growth through more pro-business policies.  

Brown says the country has admittedly made a lot a progress, but the change has not been as fast as many of us would like it to be. “In many ways we are running out of time.”

The country has gone from ‘Ramaphobia’ to ‘Ramaphoria’. What we cannot have, says Brown, is a year of ‘Ramapostponia’.

Orange overalls will come

The fight against corruption cannot stop, he adds. South Africans and the world want to see some people in orange overalls. But this will take time.

“As business we have to make sure that we stand up with a strong voice to resist populist pressures … and continue to push government to provide clarity on policy issues.”

The time for kicking the Eskom ‘can’ down the road has come to an end, says Brown.

He referred to figures that calculated stage 1 load shedding to be equal to the loss of R1 billion to the economy per day, and stage 4 to R4 billion.

South Africa had stage 4 for more than 10 days in the first quarter of 2019 – equating to a loss of R50 billion.

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Just prior to the elections, Ross Johnson did some wonderful market surveys that showed a clear disconnect between our politicians and the average citizen out there.

Joe average wants a job and low crime, proper education for his kids, and doesn’t care about the ideology of getting it.

If it’s necessary to drop BEE, mining charters, protected unions, forget EWC, so be it.

Sadly Joe average isn’t running the country because if it really was a better life for all, he would make all of these structural changes so beloved of the rating agencies.

Instead, the politicians are running it for themselves and have never been able to countenance a single structural change yet. It’s all deal making, looting and cronyism.

I can’t see them rising to the occasion this time either. Indeed, half the ANC it seems are ready to recommit to looting.

Moody’s endless patience will run out and we will trigger the serious slide into the abyss.

All that you say is true, but Joe Average still voted for the ANC ! !

They have proved over the past 24 years that they are not fit to run the Country, all they care good for is stealing, stealing and more stealing.

100% nailed it.
Thumbs up to Nicky Weimar for admitting that SA needs a downgrade.

The world needs to force the changes that are necessary which will be the benefit of every South African.

Seeing that we live according the Terms and Conditions of the ANC, the average voter needs to be corrected and if not willingly they will he forced by the same people who support then change from Aparthied to Democracy.

@ Navigator – Right on! Allow the ANC more of anything at your own peril!

Put BEE ( a truly failed model) in the trash!! We should welcome all business and this model is a cost on the business owners. Many companies will not (cannot) use you IF you are not in their BEE scheme for business. They hire a cheaper firm and get cheaper results all the way to junk. Who won? Well the country lost!!!! JUNK here we come. Sad but this is what happens when you put ministers and UNQUALIFIED PEOPLE in charge of portfolio’s they know nothing about. They took a woman from H R with a background in Social Sciences and put her in charge of the police. How’d that work out? “

…about the same as when the DA put a 30 year old ex-speechwriter in charge of Cape Town’s water management a few months before their Day 0 disaster (and she is still there, earning a R3Million+ salary like the rest of the DA fatcats)

Two sides of the same coin.

For the choices we have in SA (if you believe in democracy) I disagree. It is like choosing to be run over by a steam roller (the ANC) or tricycle (the DA). By all measured metrics the DA perform better than the ANC. It is a devil’s choice but make it I say.

On a separate note; the DA should never have followed the ANC down the amoral AA/BEE rabbit hole but that goes for 99% of SA businesses that sheepishly comply. Flay them too.

Clap clap buddy. Can you sift through the cANCer rubbish and find another example. Because I can give you millions for the ANC

Moody’s did not quite cover themselves with glory at the time of the credit crunch. They run a very real risk of credibility here.

Orange overalls will not come anytime soon. I can not think of one high profile politician locked up for corruption.

I don’t believe a downgrade has been priced in. Our market would not have been following world markets as it has. How could it. There is just bad news and it is remarkable that it has performed the way it has.

I will get a very hard klap.

I reckon Argentina must feel relatively hard done by over the last ten years – it seems like the rating agencies were harder on them than they have been on SA.

What drives me crazy is reading about “deployed cadres”. When are we going to hear of people being promoted due to their excellent capabilities and past performance? Enough with this communist lingo already !

Nickey Weimer (Nedbank)says the market has priced in a possible downgrade.

Analysyts estimate R100 billion of capital flight if we get downgraded. So, when they push the sell button on R100bil, the rand won’t budge?

Ja well no fine.

I want more of what to do now and what a downgrade will mean because it looks like it is coming as Sleepy Cyril is still doozying along.

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