Ratings agency Fitch has warned of the risk that President Cyril Ramaphosa’s economic reform agenda could be derailed by the “farmgate” allegations and the damage these could do to his authority and electoral prospects.
Fitch, which in December upgraded its outlook on SA’s rating from negative to stable and reaffirmed this on July 7, said its core view was that Ramaphosa would retain the ANC presidency at December’s elective conference.
However, Fitch country risk associate analyst Lara Wolfe said the agency expected Ramaphosa to face increasing challenges to his authority in the run-up to the elective conference. The direct challenges to his bid for re-election as president of the ANC had increased substantially in June after the emergence of allegations over the theft of foreign exchange from his farm, Wolfe said.
Headwinds
“We believe these allegations risk increasing headwinds to the president’s reform agenda, which includes tackling ANC corruption and business constraints such as power shortages,” she said.
While it was not the agency’s core view, if a new ANC leader was elected in December, Ramaphosa would struggle to pursue his policy agenda even if he remained president of the country — and any president who replaced him would be less reform minded, she said in a Fitch webinar on the outlook for Sub-Saharan Africa.
Ratings influence the cost at which the government borrows on the market and so affect the cost of borrowing across the economy. With government bond yields spiking to well over 10% recently, their views will be closely watched.
In a week in which the rand has weakened to as low as R17 to the dollar, Fitch said it now expects the rand to average R15.80/$ to the dollar in 2022, against R14.80/$ in 2021.
Wolfe said the weakening had been largely due to domestic factors including the severe floods in KwaZulu-Natal, the uptick in load-shedding and uncertainty caused by recurring corruption allegations against Ramaphosa, as well as general global risk-off sentiment.
She warned of the risk that elevated inflation posed to social stability in SA, saying sustained high inflation might be a campaigning point for any challenger to Ramaphosa at the ANC’s conference in December.
Fitch now expects the Reserve Bank to implement further hikes of 125 basis points before the end of 2022, in response to elevated inflation and a more hawkish stance by the US Federal Reserve.
Elevated inflation and a poor labour market would cap SA’s economic growth at 1.7% this year, well below the Sub-Saharan average of 3.2%, Wolfe said.
This is down from the agency’s 2% forecast in December, when Fitch, which traditionally has been quite negative on SA, became the first of the big three global ratings agencies to upgrade its outlook, citing the faster-than-expected recovery and a surprisingly strong fiscal performance in 2021.
Positive
Moody’s, whose rating is one notch above those of the other two agencies, changed the outlook to stable in April on an improved fiscal outlook, though warned of constraints to growth “emanating from a malfunctioning labour market and decaying infrastructure” as well as weak state-owned enterprises.
S&P revised its outlook to positive in May, citing favourable terms of trade, which continued to support SA’s fiscal and external balances. But it, too, sounded warnings about weak growth and the fiscal risk posed by public sector wage talks.
At BB-, Fitch and S&P have ratings on SA which are two notches below investment grade and one notch lower than Moody’s. While these ratings remain firmly in subinvestment, or “junk”, territory, the stable or positive outlooks suggest there is little risk of further downgrades for now. Though with the deterioration in the global outlook and SA’s recent domestic woes, particularly load-shedding, markets will be watching their next round of updates later this year.
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