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The last credit downgrades show South Africa is past the point where credit rating agencies will give the country the benefit of the doubt on growth reforms and fiscal consolidation, say economists at the Bureau of Economic Research (BER).
In a research note published on Monday (November 23), the BER said that it is time for the country to deliver on its promises before agencies begin to consider changing their assessments on South Africa.
After the latest round of rating actions, Fitch has overtaken S&P Global as the agency with the weakest rating outlook for South Africa. While these two agencies now rate South Africa three notches below investment grade, Fitch maintains a negative outlook on its rating.
“Fitch’s conclusion was that an insufficient delivery record raised doubts about the rapid implementation of structural reforms that enhance growth in South Africa,” the BER said.
“Even if implemented, Fitch argued that the reforms will have limited impact. It is also likely that it will take time for positive impacts to accumulate. We are less pessimistic about the potential for reforms to help turn the needle on growth, but we agree that the positive impact will only be seen over time. “
Moody’s highlighted the same factors as Fitch, however the agency focused more on the lasting negative impact of Covid-19 on South Africa’s GDP growth and fiscal balances.
The agency expects the health crisis to intensify South Africa’s long-standing economic and social constraints, even among the highest levels of inequality in the world.
“For Moody’s, the concern is that this will make it difficult to implement reforms, which will pose more risks to growth in the medium term,” said the BER.
“They argued that, although South Africa is not the only country severely affected by the health pandemic, our ability to mitigate the impacts of the unprecedented shock in the medium term is weaker than in many other countries.
“This is due to our notable pre-Covid fiscal, economic and social constraints, including increased borrowing costs. The negative rating outlook assigned by Moody’s reflects the risk that SA’s debt dynamics may turn out to be worse than currently projected ”.
S&P Global, which has generally led the group in downgrading South Africa’s rating below investment grade, kept its rating unchanged and also maintained a stable outlook on current ratings.
While S&P highlighted the same concerns as Fitch and Moody’s, it argued that the stable rating outlook was supported by the country’s credit strengths.
These include a credible central bank, a flexible exchange rate, and deep capital markets. These factors should help counteract low economic growth and fiscal pressures.
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One of the key points of concern is the public sector wage freeze that the government has planned for the next three years.
The proposal is contained in the Medium Term Budget Policy Statement (MTBPS) that the Minister delivered in October. Approximately R36.5 billion has been reduced from employee compensation, mainly due to the freeze on salary increases.
However, the track record shows the country is likely to capitulate to demands from unions and workers, meaning a wage freeze is unlikely to be successful, said Jan Friederich, senior director at Fitch Ratings. Bloomberg.
“If you look back over the last decade, there have always been excesses in wage negotiations, even when the government’s offer was a little more generous.
“Now, it is a wage freeze in an environment where there is still some inflation, which is quite a drastic measure. A lot of the savings depend on it and it’s very uncertain. “
Analysts and economists have long had doubts about the government’s ability to implement the wage freeze, saying it has a poor record of complying with declared budget cuts around the wage bill.
Mboweni responds
Finance Minister Tito Mboweni criticized the credit rating agencies for the downgrades, saying it was like “hitting (South Africa) while it was down.” This was particularly egregious during a global economic crisis, he said.
He described the downgrades as “painful” and said the country urgently needed to move to implement reforms to avoid further downgrades.
There is something called the Queensbury rule. You don’t keep hitting someone on their knees. You do not. It is the rule. Civilized people abide by that Rule in business, sports, and politics. The rating agencies should treat us in the same way. During a global crisis!
– Tito Mboweni (@tito_mboweni) November 22, 2020
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