Local markets look set to weaken on Monday —
reflecting capital outflows as investors digest Friday’s decision by
one global ratings agency to downgrade South Africa and another agency’s decision
to change its outlook to negative.
The ratings agency decisions
are a clear wake-up call to the government to quickly implement reforms
that will grow the economy faster and to adopt policies that will make
businesses more confident, analysts say.
A lower investment grade rating means a higher risk is attached to that country’s debt and therefore the country must pay more when it borrows. Lower ratings also mean a country becomes less attractive to investors who prefer higher investment-grade rated bonds.
The concerns the two agencies raise for their decisions are the same and not new: weak economic growth, slow implementation of reforms that will help the economy grow faster, persistently large current account and budget deficits, rising public debt and high unemployment.
What has come to the rescue is the fact that this year SA has managed to avoid economically crippling wage strikes, although Fitch notes that this was achieved in part through accommodative wage deals.
Fitch downgraded SA’s sovereign credit rating from BBB to BBB-, which is the lowest investment-grade rating and a level away from junk status but changed its outlook to stable from negative.
More concerning, however, was Standard & Poor’s (S&P) affirming its BBB-rating but altering its outlook to negative from stable — implying a downgrade to junk was unavoidable if growth continued to falter.
Some of SA’s problems are put squarely on the government’s policy blunders.
Business confidence may improve if the government "takes the necessary steps" to improve policy co-ordination and implement delayed legislation, which may help to bolster the muted private sector fixed investment, S&P said.
The state was moving slowly in implementing policy relating to mining sector investment, much-needed labour market reforms, trade talks and industry interventions, S&P said.
Fitch shared the same views saying "policies such as visa restrictions (since amended), delays to the mineral resource law and prospective plans for land reform and a national minimum wage are not always conducive to economic growth".
While S&P could lower SA’s ratings if economic growth does not improve or if state-owned enterprises required higher government support, the biggest warning was on state spending.
"A reduction in fiscal flexibility could also lead us to lower the local currency ratings, potentially by more than one notch," S&P warned.
The Treasury’s demonstrated firm commitment to sticking to spending ceilings and spending prudently seems to have found favour with both ratings agencies. While S&P has given SA credit for commitment to fiscal prudence, slowing economic growth and the increased fiscal burden created by many of the public corporations remain key issues, Stanlib chief economist Kevin Lings said.
S&P’s decision to change the outlook to negative spoke volumes of the steady deterioration in credit metrics that has enveloped SA since the 2008-09 recession, Standard Chartered Bank economist Razia Khan said. The potential loss of SA’s hard-won investment grade rating should serve as a wake-up call to try even harder to arrest the deterioration, she said.
by Ntsakisi Maswanganyi ,
A lower investment grade rating means a higher risk is attached to that country’s debt and therefore the country must pay more when it borrows. Lower ratings also mean a country becomes less attractive to investors who prefer higher investment-grade rated bonds.
The concerns the two agencies raise for their decisions are the same and not new: weak economic growth, slow implementation of reforms that will help the economy grow faster, persistently large current account and budget deficits, rising public debt and high unemployment.
What has come to the rescue is the fact that this year SA has managed to avoid economically crippling wage strikes, although Fitch notes that this was achieved in part through accommodative wage deals.
Fitch downgraded SA’s sovereign credit rating from BBB to BBB-, which is the lowest investment-grade rating and a level away from junk status but changed its outlook to stable from negative.
More concerning, however, was Standard & Poor’s (S&P) affirming its BBB-rating but altering its outlook to negative from stable — implying a downgrade to junk was unavoidable if growth continued to falter.
Some of SA’s problems are put squarely on the government’s policy blunders.
Business confidence may improve if the government "takes the necessary steps" to improve policy co-ordination and implement delayed legislation, which may help to bolster the muted private sector fixed investment, S&P said.
The state was moving slowly in implementing policy relating to mining sector investment, much-needed labour market reforms, trade talks and industry interventions, S&P said.
Fitch shared the same views saying "policies such as visa restrictions (since amended), delays to the mineral resource law and prospective plans for land reform and a national minimum wage are not always conducive to economic growth".
While S&P could lower SA’s ratings if economic growth does not improve or if state-owned enterprises required higher government support, the biggest warning was on state spending.
"A reduction in fiscal flexibility could also lead us to lower the local currency ratings, potentially by more than one notch," S&P warned.
The Treasury’s demonstrated firm commitment to sticking to spending ceilings and spending prudently seems to have found favour with both ratings agencies. While S&P has given SA credit for commitment to fiscal prudence, slowing economic growth and the increased fiscal burden created by many of the public corporations remain key issues, Stanlib chief economist Kevin Lings said.
S&P’s decision to change the outlook to negative spoke volumes of the steady deterioration in credit metrics that has enveloped SA since the 2008-09 recession, Standard Chartered Bank economist Razia Khan said. The potential loss of SA’s hard-won investment grade rating should serve as a wake-up call to try even harder to arrest the deterioration, she said.
by Ntsakisi Maswanganyi ,
No comments:
Post a Comment