The Brics sovereign is still worrying the risk experts – and its downgrades seem likely to continue.
South Africa’s total risk score continued its downward trend during the first few months of 2015, falling just below 52.2 points out of a maximum 100 – 1.7 points lower since 2014 and 4.7 in total since 2010 – in Euromoney’s survey of economists and other risk experts.
The slide has taken South Africa further down ECR’s global rankings to 59th out of 186 sovereigns surveyed, and towards the bottom of the third of five tiered categories, symbolizing a BB+ to A- credit rating.
That is 10 places, and more than four points, below Botswana, the safest credit in sub-Saharan Africa, highlighting the small but gently rising probability of default enshrined in the sovereign’s five-year CDS spread of 218 basis points this week.
The country is still an investment-grade rated BBB by Fitch and Baa2 by Moody’s, but only one step from junk status, rated BBB-, from S&P.
Colen Garrow, chief economist at Meganomics, believes this creates a dilemma.
In his opinion, “any downgrade, or split rating between Moody’s and S&P, where one is a non-investment grade and the other a lower investment grade, will prompt index-tracking funds to lighten their weightings of South African bonds and equities”.
This would naturally prove detrimental to the currency, and to fiscal, monetary and macroeconomic stability.
What is holding South Africa back?
The love affair with South African investing faded some time ago. The country scores lowly for most of its economic indicators – barring bank stability, which is reasonably assured – and has previously come under scrutiny from the experts when the pressure was on emerging markets reliant on capital flows.
The employment/unemployment picture is notably cloudy, and two indicators – economic growth and currency stability – are low scorers in the survey, and both were downgraded during Q1 2015.
The economy is struggling to convince the experts with only 1.5% real GDP growth recorded last year. There are twin fiscal and current-account deficits exceeding the 3% of GDP risk-limits, and public debt has risen sharply since the 2008 global crisis to more than 45% of GDP.
The country has been badly affected by strike action in the mining and manufacturing sector, and by power shortages caused by a lack of reform to electricity production, illustrating a wider problem concerning the management of utilities, which are constraining economic potential.
A stronger eurozone would aid South Africa’s exports, but the risks there, not least in relation to resolving the Greek crisis, and the fact demand from China is slowing as well, add to these domestic problems to make the Treasury’s 2% GDP growth forecast for 2015 a tall order.
The IMF and some private-sector forecasters remain equally optimistic, but Garrow believes it might be half the pace needed, and will not be helped by the Reserve Bank having tightened monetary policy in 2014.
It might need to further increase its policy interest rate to counter the rand’s decline and resurgent inflationary pressure as energy, fuel and food prices rise.
Political risks are high, moreover, with corruption the lowest-scoring indicator and institutional risk downgraded since 2014.
There are still huge social challenges posed by wealth disparities and the influx of immigrants, resulting in the army deployed to quell recent attacks on foreigners, which could lead to reprisals and might inflict some damage on trade relations.
Garrow believes the situation might well become worse before it improves. South African investors are in for a bumpy ride.
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.