December is a tense time for the South African economy. Fifteen years ago it was the month the rand crashed. A year ago, almost to the day, it was the month market mayhem broke out when former finance minister Nhlanhla Nene was fired, a shock that came just days after negative rating actions by S&P Global and Fitch.
This time, we were waiting for December to see whether S&P would act on its negative outlook and become the first of the major agencies to take SA’s rating down to subinvestment grade, "junk" status. In the event, it did not. The only one of the three majors that took action was Fitch, which like S&P has SA rated on the edge of investment grade and has now put the outlook on negative.
SA is now on watch for a downgrade at all three agencies. The question is what chance we have of scraping through to next December with all three investment grade ratings still intact. Sizing that up requires a look at why the ratings agencies held off this time, and what signals they have sent us, as well as what might or might not happen in local politics — and global economics.
This time, the ratings agencies gave SA the benefit of the doubt. Next time, they might not. If we fail, though, it will probably not be for lack of trying by the business, government, labour and even religious leaders who have, since January, banded together to launch an intense effort to lobby the ratings agencies not to downgrade us and persuade the government and others to effect some of the changes needed to boost economic growth and avert a downgrade.
There cannot be many countries where ratings agencies and international investors find themselves meeting with the kind of team SA now fields, a team that started to come together when leading CEOs began to work with newly reappointed Finance Minister Pravin Gordhan as they headed to the World Economic Forum in Davos in the wake of the "Nenegate" crisis.
Gordhan and the Treasury have given much of the credit for SA’s success in averting a downgrade in the latest round of ratings to that collaborative relationship, as have business leaders. Countries such as Turkey have long been engaging proactively with ratings agencies. SA came to this quite late, some insiders say, in part because it had become complacent in the long years in which ratings agencies popped in for just as long as they needed to drain their cups of tea and tell officials they had no worries about SA.
That went back to the boom years when SA found itself in a virtuous fiscal cycle, in which revenues kept exceeding targets and debt kept falling. The economy grew strongly and the balance of payments position improved, so that by 2005-06 SA’s democracy, which had started out with just one investment grade rating in 1994, was rated by all three agencies at the top of the triple B grade. That held until well after the global financial crisis, with SA getting credit for its rapid economic recovery and good fiscal management. But by 2012 it started to become clear SA’s economic growth was lagging its peers and that its fiscal ratios were deteriorating fast.
The strange thing about SA’s ratings is that on many of the numbers it does not look good at all relative to its peers in emerging markets and in the same ratings band
Marikana was the trigger for the first of the downgrades by Moody’s and S&P in 2012, which quite rapidly took SA down to the bottom of the triple Bs, just on the edge of subinvestment grade, on the S&P and Fitch scales. SA’s ever-weakening growth rate has been the biggest concern, and although Gordhan began from 2012 to try to cap government spending and stabilise the public debt level, lower than expected growth each year put question marks over his and Nene’s fiscal consolidation efforts.
It is the fiscal metrics that ratings agencies had traditionally watched most closely, but political economy issues and more recently pure politics, have increasingly occupied centre stage because those are the key factors driving SA’s growth outlook and therefore the prospects for its public finances and its ability and willingness to service the public debt – which is what ratings agencies really rate.
The strange thing about SA’s ratings is that on many of the numbers it does not look good at all relative to its peers in emerging markets and in the same ratings band (see graphics). Its growth outlook stacks up poorly compared to other emerging markets and its rapidly rising debt service ratio — how much of government’s revenue goes to pay the interest on the public debt — does not look good either. SA continues to run more of a deficit on the current account of its balance of payments than any of its ratings peers, and depends on large but volatile inflows of foreign capital to finance these.
These are all concerns for ratings agencies and though SA, since the National Development Plan in 2011, has been promising structural reforms to boost investor confidence and raise the growth rate, not a lot has happened. And the increasing political infighting and state capture seems to make it unlikely that anything will. Yet the three ratings agencies affirmed their ratings in 2016.
In the earlier ratings in May/June, the February budget helped; and the lobbying by the business-government-labour team clearly made a difference. The growth outlook had deteriorated further, as had the political environment, but the team promised progress on structural reforms and asked the ratings agencies to give SA time. Which they did. But in the absence of delivery, the lobbying could not on its own have done the trick again. Fitch took the first step to a downgrade by putting the outlook on negative, citing political risks to governance and policy making, infighting in the ANC and depressed confidence and investment.
But Moody’s, which decided to take no action at all after affirming SA’s ratings and its negative outlook in May, and S&P, which had seemed the most likely to take SA into junk territory, almost seemed to be looking for reasons to hold back. And the reasons they found were a combination of the political and institutional, with small signs of reform. It is hard to believe ratings agencies are so naive as to fall for eleventh-hour interventions such as the long-awaited publication, almost as they arrived in SA, of the Integrated Resource Plan or the Sunday meeting that reached broad agreement on labour reforms — or even the Cabinet’s endorsement of new frameworks for state-owned enterprises. Yet they seemed to have given SA credit for trying.
It is also hard to believe that lobbying alone would have convinced them. Yet they seem to have been persuaded that a move, however limited, towards greater trust between business, labour and government was a start to rebuild investor confidence and eventually investment and growth — even if on the government side that trust did not necessarily extend much beyond Gordhan and some of his Cabinet colleagues. While the numbers had not improved much between June and November, they had not deteriorated much either, with S&P pointing to some improvement in SA’s balance of payments and external position — an improvement that could prove short-lived if the global economy turns down. And although the fiscal numbers were worse, SA got credit for sticking with its commitment to fiscal consolidation despite a weak economy.
The big risk is that it could end badly, and clearly the agencies will be quick to act, for example, on any sign of political interference in strong institutions such as the Reserve Bank or the courts, or an investor-unfriendly Cabinet reshuffle
But reading between the lines, the real story was about politics and contrary to President Jacob Zuma’s recent attack on the ratings agencies for making ratings too political, chances are that, ironically, it was precisely the politics that saved us this time, and more specifically SA’s institutional strength. Moody’s had taken a particularly positive view of the outcome of SA’s local government elections, which it sees as bringing political competition that could ultimately lead to more market-friendly policies. At S&P, proof of SA’s institutional strength and independence was high on the list of credit positives. The independent media and its coverage received a special mention in S&P’s report.
The checks and balances provided by an independent judiciary received even more special mention. As S&P lead analyst Gardner Rusike put it, there have been signs, such as the public protector’s state capture report, that SA is moving in a constructive direction.
So although political instability and the threat it poses to economic policy-making and to the public finances looms large as a concern for all three agencies, they seem to have given us more time, again, in the hope that the political warfare could end well. The big risk is that it could end badly, and clearly the agencies will be quick to act, for example, on any sign of political interference in strong institutions such as the Reserve Bank or the courts, or an investor-unfriendly Cabinet reshuffle.
They will surely be watching very closely too to see if those small signs of reform turn into anything more substantial and if SA can begin to deliver on its promises of reform.
SA has been given the benefit of the doubt in 2016; it won’t be in 2017.
• Joffe is editor-at-large.
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