Credit improvement hinges on stable policy environment
Labour unrest, sluggish economic growth and widening political divisions prompted Moody’s and Standard and Poor’s (S&P) to downgrade South Africa’s credit rating in 2012 – leaving it on the brink of junk status – while Fitch revised the sovereign’s credit outlook to negative, citing limited progress on policy reforms.
This year is therefore pivotal for the government to restore investor confidence in the country. Investors hope the government can initiate policies that will assist growth while enabling the country to consolidate its public finances. However, a weaker policy environment could prove to be a hindrance in putting the economy on the road to full recovery.
Weaker institutional strength was cited as a main driver in the decision by Moody’s to downgrade South Africa’s credit rating to Baa1 from A3 last year. The country’s institutional-strength metric was revised to moderate from high by the rating agency in October.
“The revision is essentially a downgrade in our appraisal of the authorities’ capacity to handle the current political and economic situation, and to implement the effective strategies that would put the economy back on the road to faster and more inclusive growth,” reports Moody’s.
The trend is reflected by analysts participating in Euromoney’s Country Risk survey, which shows that South African experts lowered their assessment scores for the country’s institutional risk indicator from 6.1 points in Q1 2012 to 5.8 points in Q4 2012.
This score decline leaves South Africa’s institutional risk in a relatively positive position in comparison to other middle-income countries, but further deterioration in South Africa’s institutional and policy environment could lead to investor confidence eroding in 2013.
National Development Plan
Against expectations, president Jacob Zuma, the National Executive Committee and all the delegates at the ANC leadership conference endorsed the National Development Plan (NDP).
Successful implementation of the plan would help pave the way for the government to reach its deficit-reduction targets and achieve greater policy uniformity in government and policy circles.
Kristin Lindow, an analyst at Moody’s, says: “A lack of policy coherence was one of the drivers for our rating downgrade in September last year. The NDP is an important policy proposal from government economic experts that calls for implementing structural reforms long resisted by politicians. We see the ANC’s broad support for the NDP – going all the way up to the top echelons of the party – as credit-positive.”
However, substantial implementation risk remains. The prevailing political environment is not conducive to unanimous implementation of the plan – the trade unions and some ANC delegates oppose the plan – and waning investor confidence could lead to a shrinkage of private sector contributions, needed for the plan to get off the ground.
Sluggish economic growth brings country’s performance under radar
Weakening external conditions for South African commodities added a strain on the economy’s growth trajectory in 2012.
The South African economy is expected to grow to 3% in 2013, according to the IMF, down from a July projection of 3.3%, while the IMF maintained its projection of 2.6% growth in 2012.
These growth rates are disappointing when compared with other emerging markets that lie alongside South Africa in Euromoney’s Country Risk rankings. For instance, Peru, ranked 49 in the rankings, is forecast to grow 6% in 2013, and Turkey, ranked 48, is forecast to grow 3.5% – leaving South Africa, ranked 50, to lag behind similar rated countries.
|source: Euromoney Country Risk|
|source: Euromoney Country Risk|