Standard & Poor’s (S&P’s) assessment of whether or not to downgrade South Africa’s sovereign rating in the coming two months will centre on the country’s weak growth outlook as well as its fiscal risks, including the possibility that government might need to step in to support State-owned companies with weak balance sheets. However, the June report will also include institutional, external and monetary assessments, with much of the focus likely to be on the domestic environment, including some of the current political tensions.
The agency currently assigns South Africa a BBB-foreign currency sovereign rating, with a negative outlook, and its next ratings review is to be published in June, in line with a ratings calendar determined in South Africa by the Financial Services Board.
Speaking at a recent S&P’s function in Johannesburg, sovereign ratings associate director Gardner Rusike said the current pressures on the South African rating related primarily to the country’s weak growth trajectory and its fiscal imbalances. S&P’s lowered its 2016 growth expectations for South Africa to 0.8%, from 1.6% in November, and also moderated its 2017 outlook to 1.8%.
However, Rusike added that prevailing political tensions could also impact on pro-growth policy implementation, the absence of which could influence its assessment. “What we have seen more recently is that the focus, or the debates, have shifted to political issues happening in Parliament and at the Constitutional Court . . . which will probably divert government’s [attention] away from the issues of policy implementation, which I think is key. So there is a need to focus the energies on issues around policy implementation, which will help growth.”
In a unanimous judgment, the Constitutional Court recently found that President Jacob Zuma had failed to “uphold, defend and respect the Constitution” when he did not comply with the Public Protector’s remedial action relating to the payment for upgrades to his private Nkandla homestead.
There had been a subsequent unsuccessful attempt to impeach the President in the National Assembly and there were now several other initiatives under way to place pressure on Zuma to resign, while municipal elections, which are likely to be more highly contested than usual, especially in certain urban centres, have been set down for August 3.
Despite these tensions – which escalated in December when Zuma removed Finance Minister Nhlanhla Nene – Pravin Gordhan, who replaced the little-known David ‘Des’ van Rooyen as Finance Minister only a few days after his appointment, had been moving to unite government, business and labour behind the creation of a credible action plan to stimulate growth.
The initiative was focused primarily on removing domestic constraints to business confidence, investment and enterprise development.
Besides the political tensions, S&P’s analysis would also take account of other factors weighing on growth, including the slump in prices for South African export commodities.
The assessment would also take account of South Africa’s severe drought, as well as structural constraints relating to the country’s labour market and infrastructure bottlenecks, such as electricity shortages. “If steps to address these issues are moved at a better pace, this would help us believe in the medium-term growth potential of the economy,” Rusike said, noting that such steps were required in the context of “numbers that are weak”.