SA outlook bleak says ratings agency

A recent sub-Saharan Africa report released by ratings agency Standard & Poor’s (S&P) has stated that South Africa, along with other countries in the region are in for a though year ahead.

This report comes days before the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) makes an announcement regarding the repo rate. The general consensus is that the repo rate will be increased by either 25 or 50 basis points (bp).

This warning from S&P comes just over a month after the ratings agency downgraded South Africa’s growth outlook from stable to negative. Following the downgraded, Overberg Asset Management (OAM) had stated: “A negative watch normally precedes an actual downgrade and in this instance paves the way for a downgrade to speculative grade. S&P cited weakness in economic growth as the key reason for the change in outlook and warned that a downgrade could follow if growth underperformed its modest expectations of 1.6% growth in 2016 and 2.1% growth in 2017.”

In the recent report, S&P further clarified its decision: “In December, we also revised the outlook on South Africa to negative from stable, reflecting persistent lower-than-expected economic growth. This, coupled with the government's potential exposure to weak state-owned government-related entities, could negatively affect the sovereign's creditworthiness. In addition, South Africa is exposed to foreign-investor sentiment, as about 34% of the government's stock of local-currency debt is in foreign hands.”

S&P’s report explained
“Since our July 2015 report, we have not downgraded or upgraded any SSA sovereigns, but we have revised the outlook on five to negative from stable (South Africa, Angola, Gabon, Kenya, and Mozambique),” noted S&P.

There are 18 sovereigns examined and rated by S&P within the sub-Saharan Africa region. The ratings agency revealed that of those that are rated, Botswana and South Africa are investment grade, while the remainder are speculative grade.

S&P highlighted that South Africa, along with the other two largest economies in the region, Nigeria and Angola, will be facing challenges in 2016. “For Nigeria and Angola, the low oil price will pose the largest challenge, while South Africa will suffer from sub-par growth, partly due to subdued prices for its hard commodities and electricity shortages,” explained S&P.

According to S&P, South Africa is neutral with regards to institutional assessment, with the country enjoying a comparatively advanced and diversified economy compared to other African countries. However, S&P has noted that is now considers South Africa’s “economic structure to be a weakness due to current very weak GDP-per-capita growth.”

A tough year ahead
S&P believed that 2016 is going to be a tough year for most sub-Saharan African sovereigns.  “Economic conditions for most rated SSA sovereigns will remain difficult in 2016. The main challenges stem from the region's continued heavy reliance on oil and other commodity exports, as well as lower appetite from global investors for emerging and frontier market debt issuance, owing to likely ongoing interest rate rises in the U.S. affecting relative returns,” noted S&P.

“Exchange rate pressures are likely to remain pertinent in 2016 as global liquidity conditions continue to tighten following the first U.S. federal rate hike in December 2015, while expectations of low commodity prices remain. These pressures have prompted some sovereigns, including Zambia, Kenya, Ghana, South Africa, and Uganda, to raise their domestic interest rates, but this has driven up the cost of domestic financing,” added S&P.

Furthermore, the ratings agency pointed out that a commodity price slump, together with lower GDP growth will continue to be a challenge for South Africa.

“Africa's most advanced economy, South Africa, faces a tough year in 2016 despite the projected narrowing of the current account deficit due to lower oil prices and their consequent impact on the import bill (South Africa is a net oil importer). Slow economic growth is at the core of South Africa's problems. Weak European demand for the country's manufactured goods, weak Chinese demand for its key hard commodity exports (including gold, platinum, iron ore, and coal), electricity shortages, and weak business confidence, exacerbate the issue,” said S&P.

It added: “Lower-than-expected GDP growth, combined with the government's exposure to weak state-owned enterprises like Eskom, could pose a risk to the government achieving its fiscal targets. In addition, foreign investor sentiment could add to the woes. Even though 90% of the total general government debt stock is in local currency, approximately 34% of this is held by non-residents, which makes the sovereign vulnerable to global investor sentiment, relative returns, and diverging policy decisions elsewhere. Recent reshuffles at the Treasury rattled markets and led to the withdrawal of funds, as well as exchange rate pressures.”

According to S&P the negative outlook for South Africa is a reflection of its view that the country’s GDP growth will be lower than currently expected. Factors influencing this include persistent electricity shortages, weak business confidence and the possibility to labour disputes escalating. “The outlook also reflects our view that fiscal flexibility might reduce owing to contingency risks from state-owned entities with weak balance sheets.”

According to S&P, if GDP growth does not improve or state-owned enterprises, such as Eskom and South African Airways (SAA) require higher government support than expected, it could lower its rating for South Africa. The country currently sits at one notch above junk status. If the country’s growth rating is downgraded to junk, foreign investment in the country will be limited.

However, the growth outlook could be revised back to stable (from its current negative rating) if it observes “policy implementation leading to improving business confidence and increasing private sector investment, and ultimately contributing to higher GDP growth.”