Various interesting points are made in the commentary associated with S&P Global Ratings’ June decision to affirm South Africa’s investment-grade rating, while sustaining its negative outlook. The country’s political situation is highlighted as being of particular concern, arguably displacing the electricity crisis and the country’s hostile labour dynamic as the main nonfiscal overhang ahead of the next review.
“Political tensions have increased in South Africa since the removal of former Finance Minister Nhlanhla Nene on December 9, 2015; the Constitutional Court ruling against President Jacob Zuma on March 31, 2016; and periodic disputes between key government institutions and within the ruling African National Congress (ANC),” S&P writes. “We believe that these political factors – if they continue to fester – could weigh more on investor confidence than inconclusive labour or mining-sector reform. We base our rating affirmation on the expectation that they will be held in check, albeit in the context of political jockeying in the run-up to local government elections in August of this year and the ANC’s elective conference in December 2017.”
However, the report also speaks of a possible “positive confidence shocks” associated with any finalisation of labour and mining reforms, while suggesting that recent energy improvements could “reduce some of the economic bottlenecks”.
The key issue for South Africans – particularly those from government, business and labour participating in efforts to reignite economic growth and stave off a year-end downgrade – is how to ensure these shocks materialise, even if only partially.
As in the case of electricity, any positive outcome will rely on a combination of factors. Eskom would not have been able to stabilise had it not been for materially lower demand. However, there have also been undoubted improvements in plant performance, stemming primarily from a decision to deal decisively with what had become a precipitous deterioration in coal-fleet availability.
Equally, there have been concerted efforts by Finance Minister Pravin Gordhan, and Nene before him, to deal with fiscal imbalances – an intervention that seemingly enjoys the backing of the ANC National Executive Committee, which stated recently: “The new priority for fiscal policy now is that expenditure must be controlled and tax revenues raised in order to avoid a debt trap.”
Such rationality also needs to be applied to tying the various other loose ends worrying the rating agencies and many South Africans: amendments to the Mineral and Petroleum Resources Development Act and associated Mining Charter; State-owned company finances and governance; and improving prospects for labour peace.
Positive shocks in these areas, together with the initiatives emerging from the government-business-labour workstreams, will go a long way to ensuring not only the avoidance of ‘junk’ status, but also that the economy begins to grow at a pace more in line with its potential.