Has government fulfilled its structural reform promises?

Credit ratings agencies Standard & Poor’s (S&P), Moody’s and Fitch will be releasing their credit ratings for South Africa in the coming weeks. Reports highlight that many experts and economists expect a credit rating downgrade to be inevitable.

Dr Azar Jammine, director and chief economist at Econometrix noted that it will be a “really close call” as to whether or not we receive a credit rating downgrade. “I personally think there is a high probability that we will get a down grade. There are a number of factors that influence the decision. The first is fiscal consolidation, government has gone out of its way to succeed in that regard, but the economy is just not growing fast enough to generate the taxes that are needed to help government to sustain its expenditure at the level that it intended. Secondly, State Owned Enterprises (SOEs) are a big problem and here I don’t know if we’ve seen enough progress in terms of resolving it, and the fact in the Auditor General’s report he expressed great concerns about the financial sustainability of the SOEs given all sorts of irregularities in the way goods are being procured.”

By contrast, Pietman Roos, senior consultant at Instinctif Partners, does not believe that a ratings downgrade is likely. “I think the MTBPS and the budget earlier this year, everything is showing foreign bond investors that everything is fine, we can pay our bills. Yes, the political thing is a problem, but as it stands it can go either way, but hopefully [there won’t be a downgrade].”

What are the ratings agencies looking for?

According to Jammine, the ratings agencies are looking for higher economic growth, which will improve government’s ability to raise taxes to cover fiscal expenditure. However, the economy is “still languishing at virtually zero growth, tax revenue is falling, and structural reforms are probably insufficient.”

Jammine noted that we have not really seen any major structural reform, and this is essentially what the ratings agencies are looking for. “Attempts have been made by Pravin Gordhan and his team of CEOs to try and give the impression that a lot is being done, but if you study the agreements in detail, you realise that agreements have been reached on relatively small issues.”

Enough has not been done to help the country ward off a ratings downgrade, stated Jammine. If South Africa is given a reprieve now (as was already done in June when the credit rating came under review), Jammine said that it is simply a “case of kicking the can down the road, and I don’t think enough is going to be done. I think we got that chance already in June when they did the last reviews, and I don’t know if they are going to want to carry on any further.”

However, not everything is bad news. While financially the country may not be operating at its optimum, Jammine highlighted that the courts and judicial system have been working well. Yet, he is not sure whether this alone will be enough to hold off a ratings downgrade at this stage.

Government make a final push

With the ratings review coming up in just a matter of weeks, government is making a last concerted effort to show the ratings agencies that it is trying to stabilise the economy and encourage growth. On Sunday, government, labour and business met to discuss a number of issues, including the introduction of a national minimum wage. It is hoped that the agreements reached at this meeting will help avert a credit rating downgrade, according to one report.

Despite this, Jammine believed that it is too late to make a last push such as this to improve the situation in the country and avoid a downgrade. Having had the whole year to work towards meeting the criteria and objectives required to avoid a ratings downgrade, Cabinet last week called on South Africans to unite to ensure that we do not get downgraded. Yet rather than focusing on this throughout the year, Jammine pointed out that government has been more focused on the Hawks and Pravin Gordhan, saying that “it’s a bit late to be making a call for unification.”

What will a ratings downgrade mean?

According to Pietman Roos, senior consultant at Instinctif Partners, a credit rating downgrade could see an emergency meeting of the Monetary Policy Committee (MPC) to increase the interest rate, outside of the normal set period.

Jammine noted that the Rand could weaken further in the instance of a ratings downgrade.

For more information on the possibility of an interest rate hike this week, click here.

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