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.
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.
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.