The economy is beginning to improve, but investor engagement will remain at arms-length as the nation’s domestic political troubles rumble on.
|Shadowboxer: President Jacob Zuma is in fighting form, but his administration’s|
political concerns are escalating
Contributors to Euromoney’s survey have taken a dim view of South Africa’s prospects in recent years, downgrading risk factors that has led to the sovereign borrower plunging 18 places since 2010 in Euromoney’s global risk rankings, to 63rd out of 186 countries.
South Africa’s risk score continued falling in the first half of 2017, and provisional results from the latest, third-quarter survey, due to be released in early October, show the trend is likely to continue.
This is making South Africa a riskier proposition than most other comparable emerging markets (EMs), including Bulgaria, Hungary, India, Philippines, Romania, Turkey and, now with a further score decline, Indonesia.
The rand has this year withstood the political uncertainty, ministerial shake-ups and rating downgrades, but South Africa is close to losing its tier-three rating – the middle of five categories into which all 186 countries are distributed according to their relative investor risk.
A borderline tier-three/tier-four rating is synonymous with a BB+ sovereign credit rating, in line with current assessments from Fitch and S&P, but argues for Moody’s to further downgrade its Baa3 rating, presently on negative outlook.
And if the risk-score decline worsens, it signals even more credit-rating downgrades to come, with potential currency volatility if investors start to reassess higher-yielding EMs with disappointing growth prospects and challenging political risks.
One of the main issues is the political uncertainty relating to succession within the ruling party, African National Congress (ANC), according to Mike Davies, one of Euromoney’s survey contributors and director of Kigoda Consulting in Cape Town.“The ANC national conference in December will elect a new party president and other leaders,” he says. “The election race is widening divisions within the party and the outcome is highly likely to result in a split, particularly if deputy president Cyril Ramaphosa is unsuccessful.”
South Africa is one of the rare examples where all six political risk factors have been consistently falling, signalling institutional and policymaking weaknesses, concerns over corruption and transparency, government instability and increased non-payment/non-repatriation risk – a litany of problems worsening the country’s attractiveness.
The concerns surrounding president Jacob Zuma’s administration are not new, but are escalating.
“Allegations of ‘state capture’ reflect the extent to which governance at state-owned enterprises (SOEs) such as power utility Eskom and South African Airways has been compromised in support of patronage,” says Davies.
“This mismanagement has raised significant concerns over the implications for the Treasury with growing levels of debt and considerable state guarantees exposed.”
There are, at last, some encouraging signs of economic improvement, with GDP rising in real terms in Q2 2017, putting an end to the recession, but massively helped by a good harvest providing a boost to agricultural output.
Annual growth is barely higher than 1% this year and the fiscal situation is hugely problematic, with tax revenue missing its target in the first quarter of the 2017/18 fiscal year (to end-March next year).
Malusi Gigaba, the finance minister since March, will be seeking to raise taxes to plug the gap, offsetting the economic stimulus effect from lower interest rates, which might be further reduced, putting pressure on the rand.
“A higher-than-expected debt burden and weaker-than-expected GDP growth provide a lethal cocktail for a wide range of key financial stability ratios – budget, public debt, interest on servicing debt, public sector borrowing requirement and current-account deficit,” says Colen Garrow, chief economist at Meganomics.
Deterioration of these ratios increases the prospect of another credit-rating downgrade and that would increase the cost of servicing debt, diverting funds from other areas where fiscal spending is needed, including payment of social and welfare dependency grants.
“Ironically, the South African Social and Security Agency is not on the schedule of SOEs needing assistance, when it perhaps should be,” says Garrow.
“On balance, major credit rating agencies are flagging concern that based on their metrics public debt may be higher than National Treasury estimates, and instead closer to debt-trap levels exceeding 60% of GDP.”
That is when countries issue additional debt to service interest payments on existing debt, so bearing in mind the worrisome political environment, South Africa is a notable concern, and on risk metrics now more so than most other EMs.
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