Standard & Poor has seen little progress on promised reforms in South Africa

Coming back from a downgrade to junk status is not impossible — but it is very difficult, the rating agency says, as its next review of SA approaches

Ratings agency S&P says that in order to affirm SA’s sovereign credit rating come December 2, it needs to see more progress on the economic reforms to which the government committed in June.Its decision to affirm the country’s credit rating in June at BBB-, the lowest investment-grade level, was supported by the impetus from government to implement reforms in order to stimulate growth, Gardner Rusike, associate director for global ratings, said on Thursday.

“Since then we have seen little progress on the things government said they would like to do. For us to continue affirming the ratings it is important that we see government doing what they should be doing on the economic reforms, which would give us comfort that the risks can change,” Rusike said.
S&P would like to see government issue a progress report to indicate how the economic growth outlook had improved in the medium term and business confidence had increased, Rusike said.
Slow economic growth not only hurt SA’s wealth levels, which had declined in dollar terms; it also had implications for the fiscal trajectory. The revenue gap had widened since February, as tax revenue was linked to the performance of the economy, Rusike said.
The Treasury widened its budget deficit forecast to 3.4% of GDP in October’s medium-term budget, from the 3.2% forecast in the February budget.
S&P took comfort in the expenditure ceilings that were in place, which would mitigate the effects of the deficit, he said. “The deterioration is still within acceptable thresholds, [but the] Treasury must be able to stabilise debt.”
State-owned enterprises posed a further risk to the fiscal and debt burden, Rusike said.

While the Treasury had tried to impose broader reforms on state-owned companies in exchange for financial support, there needed to be greater political will to implement these reforms, he said. State-owned entities “remain a contingent risk on government finances”.
S&P rated the strength of SA’s institutions as “neutral”.

Checks and balances in the economy were provided primarily by the judiciary and not by other arms of state, while political infighting could undermine the government’s commitment to making the right policy choices, as well as the pace at which this happened, Rusike said. “It is important that government pulls together.
“What we are looking for is to see policies that are supportive of turning around the economic trajectory and providing growth in the medium term, as well as a faster fiscal consolidation path in line with what was outlined in February.”

It was important to see economic reforms, reforms of state-owned enterprises, and political dynamics that were in check, he said.
If these reforms did not happen, it was possible the negative outlook on SA’s sovereign credit rating could be resolved earlier than the 24-month period usually given for investment-grade ratings, Rusike said.
Of the 20-odd countries that had lost their investment-grade rating from S&P since the 1970s, only eight had managed to regain that rating, said Konrad Reuss, MD of S&P South Africa.

“It’s tough to come back but it’s possible. There’s life after a downgrade,” he said.

by  Hanna Ziady/Thisday