12 Reasons Why South Africa Will Avoid A Ratings Downgrade In December
Despite all of the issues plaguing South Africa at the moment, the smart money seems to be on the country managing to avoid a ratings downgrade in 2016.
After surviving the potential downgrade of the country’s investment grade credit rating in June this year, the ratings agencies are set to pronounce judgement on South Africa once again in the coming months, and there is a risk that the country could be downgraded to below junk status.
This would have far-reaching consequences for the economy of South Africa, and would be a disaster to one of the powerhouses of the African continent. Despite the fears, many believe that South Africa’s case does not warrant a downgrade, at least not at this stage.
Here are 12 reasons why South Africa will avoid a ratings downgrade this December.
The rand has strengthened
From a high of around R16.84 to the dollar in January, the rand has recovered to dip below R14 to the dollar, even reaching around R13.31 in August. The gains against the British pound have been even more pronounced due to fallout from BREXIT, as the rand is now under R17 to the pound versus a January exchange of around R22.83 to the pound.
A recession has been avoided
While many countries around the globe are in a recession, South Africa will still experience some growth in 2016. In the recent medium-term budget speech the government revised its GDP growth forecast for 2016 from 0.9% in February to 0.5%. Not great news, but not a recession.
South Africa’s institutions remain strong
Despite political uncertainty and other varied challenges, South African institutions remain strong. This refers to institutions such as the independent judiciary, the Reserve Bank, the auditor general and National Treasury, which all operate effectively without government interference.
Moody’s will set the tone
Moody’s is the most optimistic of the three ratings agencies, currently holding South Africa’s rating at two notches above junk status. Moody’s will deliver its rating review at the end of November, while both Fitch and S&P will do so in early December, and perhaps a positive review by Moody’s will influence the other two.
Future growth expected
While the economy is not growing at a decent pace at the moment, real GDP growth is expected to accelerate over the next three years, with economic growth projected to reach 2.2% in 2019. This is not major growth, but it is growth nonetheless, compared to current levels below 1%.
Government debt is under control
Government continues to work hard to stabilise their foreign debt ratio over the medium term, and thus far they should be commended for their efforts in a difficult economic climate. Continued work to stabilise national debt as a share of GDP is pleasing to the ratings agencies.
Additional tax revenue promised
The National Treasury has committed to cutting the expenditure ceiling by R26 billion and increasing tax collection by R43 billion over the coming two years, in order to stabilise South Africa’s total debt to GDP ratio at 47.9% by 2019/20. These are the kinds of promises that investors and ratings agencies like, if they are actioned successfully.
Treasury managing targets well
The South African Treasury has managed to stick to its expenditure targets. Real Main Budget non-interest spending per capita has been flat since 2010. The main budget primary balance is expected to improve to a surplus of 0.5% of GDP by 2019/20 from a deficit of just 0.4% of GDP this year.
Easing pressure from drought conditions
South Africa has been enduring one of the worst droughts on record for over a year, with 2015 being the driest year on record according to records dating back to 1904. The drought has affected the economy in many ways, increasing inflation, food costs and diverting government spending, but the drought has begun to ease in recent months, which is good news for the economy.
Despite being at the centre of fraud allegations that are described in South Africa as part of a shady plot at ‘state capture’, finance minister Pravin Gordhan has been working hard to show the international community that South Africa is ripe for investment, while preaching the message of fiscal consolidation.
Better commodity cycle
In recent years major global commodities have been in a severe bear market, with minerals such as gold topping out in 2011 before bottoming out in 2015. This year has seen this change, with gold among the strongest performing asset classes in 2016. This is great for South Africa, as the country is a major gold miner and producer.
Increasing pressure on Zuma
The unpopular president of South Africa is facing increasing calls for his resignation, even from within his own party, and international markets seem to react favourably to news of his potential departure from government. Perhaps the pressure will force Jacob Zuma out of office, which would be a positive development for investors.
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