credit rating economic policy

March on others’ advice, not our own needs, is at our peril

There is a pamphlet on the website of the Treasury that seeks to explain headline sovereign credit ratings in layman’s terms. It uses, as an explanatory device, descriptions of how a bank would treat a country as if it were an individual customer, at different points on the ratings scale.

Banks will not only lend you money at a very low interest rate if you are AAA rated, the reader is informed, but they will also offer you wine, tea, juice or anything you want if you enjoy such a rating. As you go down the scale, the interest rates are higher and the catering more basic. If you are deep into junk status, in the C ranks, it is only mashonisas who are willing to lend you money at punitively high interest rates.

The pamphlet, an accessible and humorous guide to ratings, speaks to the way the assessments of credit ratings agencies have made their way into mainstream consciousness. It hasn’t always been so.

Few South Africans can tell you when the country established itself as investment grade at the various agencies. Now, their pronouncements are keenly awaited. Across society, from left-wing academics to conservative businesspeople, the descent towards junk has come to signify the failings of the South African economy.

Commentators across the spectrum might ascribe the failure to different and often conflicting causes, but the benchmark has become the same.

In local economic debates, this has been taken too far. For some time, it was the imagined foreign investor who was used as the bogeyman to get the government to behave with economic prudence. If you do this, you will scare away foreign investment; if you do that, you will attract investment. Now it is the credit ratings agency.

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We require another historic turnaround

IT IS still too early to tell how the post-apartheid creation story will be told. But I suspect one of the founding tales that will endure is that of a new administration that inherited a near-bankrupt state (with junk status at S&P and Fitch) and turned it around into an investment-grade economy. It is a tale of how inflation was reined in, debt repaid and kept at manageable levels, and fiscal deficits tamed despite pressing socioeconomic needs that may have tempted riskier policies.

These early successes on the macroeconomic front are fraying and the political support that made them possible is no longer assured. But one cannot take away how far the country has walked towards stable fundamentals. This is a track record to be defended vigorously.

The trouble is that macroeconomic stability is only part of the puzzle when it comes to economic success. The countries that top the charts, be it on creditworthiness or competitiveness, have done far more than draft good budgets or raise interest rates timeously to earn their renown. Countries such as Norway, Germany and South Korea are also known for their high levels of productivity, their innovation as well as their competitiveness.

SA needs a similar turnaround to that mounted by early administrations, but this time focused on its structural foundations. There is near unanimity that the economy lacks competition and dynamism in its product and labour markets. Low levels of confidence have taken a toll on investment. Growth statistics show gross fixed capital formation fell 2.8% in the last quarter of 2015. This saw investments in fixed assets by the general government and the public sector falling, with public corporations the only segment to register growth.

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Fitch falls into formation

Statement from Fitch:

Fitch Ratings has affirmed South Africa’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘BBB-‘ and ‘BBB’, respectively. The issue ratings on South Africa’s senior unsecured foreign- and local-currency bonds are also affirmed at ‘BBB-‘ and ‘BBB’, respectively. The Outlooks on the Long-Term IDRs are Stable. The Short-Term Foreign-Currency IDR is affirmed at ‘F3’.


The ‘BBB-‘ rating reflects low trend GDP growth, significant fiscal and external deficits, and high debt levels, which are balanced by strong policy institutions, deep local capital markets and a favourable government debt structure.

Political risk has increased since the previous rating review in December 2015, although it is not out of line with ‘BBB’ peers. The dismissal of two finance ministers in a week in December, and subsequent tensions between the new finance minister Pravin Gordhan and other parts of the government have raised questions about the commitment of the government to sustained fiscal consolidation and prudent governance of state-owned enterprises.

President Jacob Zuma has become increasingly embattled following the Constitutional Court ruling that he should repay some public funds used to refurbish his Nkandla residence and the Gauteng high court’s ruling that the previous suspension of a 2009 corruption case against Zuma was irrational. Nevertheless, institutions have proved robust. However, Fitch expects the governing African National Congress (ANC) may lose some support in local elections on 3 August 2016. Tensions within the ANC are also increasing ahead of the conference in December 2017 to elect Zuma’s successor as ANC president.

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Ratings reprieve for now…S&P affirms SA’s ratings

Extracts from S&P statement:

Low GDP growth is putting South Africa’s economic metrics at risk and could eventually weaken the government’s social contract with business and labor.

Rising political tensions are accentuating vulnerabilities in the country’s sovereign credit profile. Still, energy sector improvements will likely reduce some of the economic bottlenecks and pending finalization of labor and mining reforms could engender a positive confidence shock. On the fiscal side, the government is showing greater resolve to reduce fiscal deficits at a faster pace than we expected.

We are therefore affirming our ‘BBB-/A-3’ foreign currency and ‘BBB+/A-2’ local currency ratings on South Africa.

The outlook remains negative, reflecting the potential adverse consequences of low GDP growth and signaling that we could lower our ratings on South Africa this year or next if policy measures do not turn the economy around.



South Africa’s weak economic growth, relative to that of peers in similar wealth categories, continues to be hurt by a combination of factors, in our view. On the external side, adverse terms of trade and weak external demand have created headwinds. On the domestic side, drought and subdued mining and manufacturing output, coupled with structural constraints, remain key negative factors. Largely due to some of these cyclical factors, we have revised down our real GDP growth assumptions for South Africa to 0.6% in 2016 from our 1.6% forecast published in December 2015. As weather patterns and terms of trade revert to mean levels, economic growth should improve.

However, to place South Africa’s economy on firmer footing and to maintain our investment-grade rating, we see several structural measures as key. The first is the provision of a reliable source of energy, where we have observed progress. Eskom, the state-owned power utility, has improved the energy supply through a better maintenance program, managing demand in peak periods, and by additions from its new power plants and from independent power producers. The combined measures have helped eliminate load shedding, which was prevalent in the last winter cycle and depressed overall 2015 economic growth.

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State of the Nation 2016 – a note on President Zuma’s address

‘A dose of reluctant realism’ is the title of a short note we prepared on the President’s State of the Nation address.

In a State of the Nation address focused on the economy, President Zuma stated that a ‘resilient and fast-growing economy’ is at the centre of government’s policy. A clear pro-growth statement was made, dispelling notions of ideological drift within the ANC. Though global economic conditions and the analogous experiences of other commodity-exporting economies got some airtime, Thursday’s speech also highlighted the domestic constraints that have stifled growth, such as energy shortages and labour unrest.

You can download and read the rest of the note here: State of Nation 2016 – A dose of reluctant realism