‘SA’s ratings outlook has improved’

The risk that South Africa will lose its investment grade credit rating has reduced slightly, after finance minister Pravin Gordhan (pictured) stuck to the fiscal promises made in October during his most recent budget speech, an economist says.

“We now forecast that it’s probably below 50% [the probability] for an investment grade downgrade by S&P this year,” Johann Els, senior economist at Old Mutual Investment Group says.

He says there were fears that Treasury would deviate from the October medium-term economic framework as it did in previous years (see graphic representation below), but the budget was the closest delivery to the October statement in many years.

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Source: Old Mutual Investment Group & Factset

There also seems to be a higher probability that Gordhan will remain in his position for a longer time and there have been slight improvements with regards to governance at state-owned enterprises.

S&P Global Ratings has repeatedly stressed that it only needed to see slow and steady improvements, he adds.

“Of course politics can play havoc with all of this, but for now maybe a slightly better chance that we won’t be downgraded.”

While ratings agencies have generally welcomed National Treasury’s commitment to stick to targets, risks remain, with Fitch Ratings’ senior director, Jan Friederich, warning last week that political and social pressures will test the government’s commitment to fiscal consolidation.

“Meanwhile, sustainable consolidation remains reliant on a still-fragile recovery of GDP growth,” he added.

National Treasury expects economic growth to gradually improve from 0.5% in 2016 to 1.3% and 2% in 2017 and 2018 respectively.

Unfortunately South Africa is still marred by a confidence crisis, which is holding back economic growth, Els says.

The Bureau for Economic Research’s quarterly survey shows that the political climate is a significant constraint on the investment decisions of businesses – even worse than it was during 1994. Real private fixed investment has dropped 9.5% from its peak.

“If there is uncertainty, if there is lack of confidence that holds back the economy and that is probably why everybody expects just slightly above 1% GDP growth this year. It is better than [the] 0.3[%] estimate for last year, but it is not great. We need a confidence recovery to make for a better growth outlook.”

With inflation still high and tax hikes soon to take effect, the first half of 2017 will probably be fairly tough on the consumer, but it will not be as bad as the 2009 cycle. However, Els expects inflation to ease to around 5% by the middle of the year with two interest rate cuts penciled in for later in 2017, which should provide some relief.

John Orford, portfolio manager at MacroSolutions, says although the economic outlook remains subdued, the economy is stabilising. Growth has probably troughed, inflation has peaked and interest rates will come down.

This should support parts of the market that are sensitive to interest rates like bonds and property. In the equity space, it also bodes well for the more cyclical local companies like clothing retailers and banks, he says.

“Politics is certainly a big factor and it is driving uncertainty about what policy makers are going to do.”

However its impact will arguably lessen through the year as elections in Europe draw to a close and the new leader of the ANC is elected.

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