South Africa’s risk score is still tottering

Harbouring concerns: The lights are on in Cape Town, but everybody’s homing in on troubled Eskom

South Africa’s fall from grace is well-documented.

Its country risk score has fallen more precipitously than most other large emerging markets during the past five years, according to Euromoney’s country risk survey.

And in 2018, with the rand under pressure, South Africa’s risks kept on rising, opening up a bigger gap to Brazil and other Brics that have been reviving:

With South Africa plunging into the fourth of ECR’s five tiered categories, the country is now a bigger risk than Namibia, and is lying 66th out of 186 countries in Euromoney’s global risk rankings.

That level calls into question Moody’s sovereign borrower investment grade rating remaining out of step with both Fitch and Standard & Poor’s sub-investment grade (junk status) ratings.

A divided opposition means the general election due on May 8 is likely to hand the ruling African National Congress (ANC) with another mandate, providing backing for president Cyril Ramaphosa to continue with policies to reinvigorate the economy and deal with the aftermath of the state capture crisis.

An inquiry is looking into the alleged corruption involving the wealthy Gupta family and members of the former administration led by Jacob Zuma that ultimately provoked his downfall.

Yet early indications suggest the country’s problems are far from resolved, with the risks remaining heightened as concerns rumble on over the financial health of Eskom, the state-owned electricity producer – which is restricting economic growth through load shedding – and key external economic risk and fiscal indicators highlighting creditworthiness.

GDP growth came in at just 1% year on year in the fourth quarter of last year, the unemployment rate was officially 27.1%, and balance-of-payment pressures persist.

A deteriorating trade balance caused the current-account deficit to widen to 3.5% of GDP in 2018 from 2.5% in 2017, and although the Q4 deficit was smaller, the rand has softened lately, unnerved by the Eskom crisis and the Treasury’s budgeting woes.

The OECD’s latest forecasts show upgraded growth forecasts of 1.7% for this year and 2% in 2020, after last year’s dismal 0.8% outturn.

Yet, in February, the Absa manufacturing purchasing managers’ index fell sharply to 46.2 from 49.9 in January, as business activity plunged due to the power cuts.

And the Treasury predicted a fiscal deficit of 4.5% of GDP, the worst in a decade for the fiscal year starting on April 1.

Among the contributors to Euromoney’s survey, Rafiq Raji, chief economist at Macroafricaintel, says the Eskom utility crisis and the May elections are at the forefront of his mind.

“Continued power cuts as we approach the May elections could sway sentiment among key stakeholders, like rating agencies, investors, and so on, significantly to the downside – especially as the extent of the rot continues to be exposed by the state capture inquiry,” he says.

Nedbank sovereign risk economist Isaac Matshego agrees, stating that one of his key concerns is the impact of power shortages on the growth outlook.

“We have for now maintained our GDP growth forecast at 1.3% for 2019, but we would revise it lower should power cuts worsen.”

He goes on to explain the margin of victory for the ANC will indicate the strength of the mandate that Ramaphosa will have to deal with corruption in government and eradicate policy uncertainty, the two key themes of his election campaign.

“It will be imperative to revive business confidence and mobilize business investment in line with the president’s objective to attract foreign direct investment,” he says.

The elections are creating considerable policymaking uncertainty, says Johann Kirsten, director of the Stellenbosch University’s Bureau for Economic Research.

“The ruling party is creating considerable confusion with statements on nationalization of the central bank and changing the constitution to allow for expropriation of land without compensation, while at the same time trying to recruit investment to the country and stimulate growth,” he says.

Kirsten notes the fact debt servicing now costs 11% of the national budget and Eskom, which is the main state-owned enterprise, is in real financial difficulty after years of corruption and looting.

“Recently, the energy regulator announced a 9% electricity tariff increase on top off a sharp rise in the cost of fuel, and business confidence is at the lowest since 2009, with political leadership hampered by factional battles in the ruling party and a noisy radical left party [EFF] threatening nationalization of land and property.”