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S&P labels threats to Sarb independence rhetoric

Muted tax revenue and contingent liabilities a risk to sovereign rating.

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S&P Global Ratings views perceived threats to the South African Reserve Bank’s (Sarb) independence as rhetoric.

Court challenges to set aside the public protector’s prescription that the central bank’s mandate be changed rule out the prospect of immediate changes, thereby allowing the ratings agency to classify it as rhetoric rather than a near-term threat, said Gardner Rusike, associate director for sovereign and IPF ratings at S&P Global.

In June, public protector Busisiwe Mkhwebane recommended changes to the constitution such that the bank be forced to promote economic growth instead of focusing on price and currency stability. Her recommendation, delivered as part of her findings into an apartheid-era bailout granted to Bankorp, sparked a sharp selloff in the rand. The Sarb and finance minister lodged court challenges against the recommendation, with the North Gauteng High Court setting aside the public protector’s remedial action in August.                    

Rusike did, however, tell delegates at an insurance seminar that the calls are “negative narrative that South Africa does not need [and] which undermines investor confidence”. 

“There are many areas in South Africa that need to be fixed… the way we assess ratings [shows] the monetary assessment is not one of them. It is important to fix things that are broken rather than to fix things that are not broken.” 

In addition to the monetary assessment, it sees the improvement in the current account deficit to around 3.5% to 4% – the lowest levels in several years – as positive in that the financing challenge has reduced. However, muted tax revenue and contingent liabilities as result of state-owned enterprises (SOEs) present risks.

Rusike said S&P’s main pressure points relate to institutional political settings, the pace of economic growth and the fiscal adjustment.

The ratings agency is to take some guidance from finance minister Malusi Gigaba’s medium-term budget policy statement and will be looking for signs that the country remains on course for fiscal consolidation. It would also look for indications that support extended to underperforming SOEs does not exacerbate the fiscal deficit as well as for governance-related reforms at the companies.

He said political risks would remain elevated ahead of the ANC’s December conference, in which it will elect a new party leader. Irrespective of the outcome, it expects a transition period for the party and possibly government too.  

S&P downgraded the sovereign to sub-investment grade after President Jacob Zuma fired Pravin Gordhan as finance minister and reshuffled his cabinet in late March. It affirmed the foreign currency rating at BB+ with a negative outlook and maintained the investment grade rating of BBB- on the local currency following its mid-year review.

“We have a negative outlook on South Africa and if we see pressures on economic performance as well as fiscal outcomes then there is a probability that the rating could be changed,” he said.

S&P’s next report on South Africa is due in late November.

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