Land reform unlikely to influence S&P ratings decision - analysts

Developments in land reform will unlikely be a factor ratings agency Standard & Poor's will consider for SA's credit rating, according to analysts.

The rating agency is expected to deliver its ratings decision on Friday. Previously S&P kept the rand denominated debt rating at BB+ -the first notch of sub investment grade, and kept the foreign currency rating at BB - which is two notches below investment grade.

Analysts Fin24 spoke to ahead of the ratings decision were unanimous about land reform having limited impact on any decision S&P would make.

Last week the Joint Constitutional Review Committee adopted a resolution to amend Section 25 of the Constitution to allow expropriation without compensation, News24 previously reported.

Independent economist Thabi Leoka told Fin24 by phone on Monday that land reform has not yet been solidified as a policy, and that a parliamentary process still has to follow. S&P would be concerned with policy certainty – and so far there has not been communication about land reform as policy.

Leoka also cited President Cyril Ramaphosa's previous statements that land reform would not happen in a way that negatively impacts economic growth.

"I would not understand justification if they (S&P) mentioned land [in their report]," she said.

Leoka is of the view that S&P would possibly downgrade the outlook because of the outcome of the mini budget – which showed a lower than expected growth projection, a widening budget deficit and higher debt to GDP rations. Treasury expects debt to peak at 60% of GDP in the next three years.

The inability to contain expenditure, combined with allocations to improve revenue collection by the SA Revenue Service (SARS) would put a "blemish" on S&P's view of revenue collection abilities, she explained.

"We have pushed many things to the outer years. We should be shrinking the budget deficit into the outer years and we have been 'pushing the can down the road' in that regard for quite some time," Leoka said.

Leoka added that S&P would be more focused on the fiscus and the monetary policy, and growth.

As for the investment and jobs summits held recently, Leoka said S&P would wait for the impact of these events on the economy.

"We had a jobs summit previously which did not do much," she said. "I think they would only respond if there is positive outcome for growth linked to the investment summit."

Elena Ilkova, credit and fixed income analysts RMB global markets research, also shared views that the lack of details regarding land reform means that it would be too early for S&P to take an action on it. But the ratings agency would monitor it carefully in reviews, she added.

Ilkova said that RMB expects no change in the credit rating or the outlook.

"S&P has been quite conservative. There is no reason to believe a change in economic growth in SA - which is lower- would prompt them to review their outlook," she said.

S&P would likely wait for the next budget, when there is more clarity on the fiscal position before taking a decision.

Ilkova added that the state capture inquiry will also have limited influence on S&P's decision, but it is part of reforms being introduced to improve governance at trouble state-owned enterprises, she noted.

Momentum Investments economist Sanisha Packirisamy shared similar views that S&P would keep the foreign currency rating on hold.

"S&P ranks Brazil and Bangladesh at one notch lower (a rating of BB-). We do not believe that SA’s macro-fundamentals are as poorly placed as these two economies," she explained.

"For example, Brazil’s debt-to-GDP reached 74% in 2017 in comparison to SA’s 53%. Similarly, Brazil’s government deficit reached 7.8% of GDP in 2017, in comparison to SA’s 4.6%."

As for land reform, Packirisamy said ratings agencies would adopt a "wait-and-see" approach to land reform before making a "hasty" decision.

"At present, little information is known on the details of how it will be conducted and the final impact it will have on the economy, but it should be noted that S&P has warned that a deterioration in SA’s property rights could be a negative trigger for ratings," she added.

Packirisamy also shared views that the prosecutions for wrong-doings following the state capture inquiry would likely have a positive effect on SA’s sovereign ratings. "It would reinforce the strength of the rule of law and the credibility of SA’s institutions, which are critical components for the sovereign rating," she said.

Packirisamy explained further that S&P would likely flag the low per capita growth SA is experiencing. The ratings agency could warn that a slower rollout of economic and social reforms could prompt a negative action.

"S&P are also likely to note that a weakening of the rule of law and/or property rights and a further deterioration in the fiscal metrics could trigger negative ratings action.

"In contrast, S&P is likely to highlight SA’s low external pressure and independent monetary policy as strengths," she said.

Mike van der Westhuizen, a portfolio manager at Citadel believes that the credit rating and outlook will be reaffirmed, but noted the poor growth outlook which would impact fiscal consolidation as factors acting against the stable outlook.

"The biggest issue at play is the country’s persistently high budget deficit which needs to be funded by additional borrowing... If one further adds to this the debt burden of certain state-owned enterprises that have issued government guaranteed debt, then this picture becomes even more unpalatable," said van der Westhuizen.

S&P would wait for the National Budget in February 2019 to determine if the fiscal consolidation set out in the mini budget can be achieved, he added. 

"This will also give them time to judge the newly appointed Finance Minister Tito Mboweni and his influence on further fiscal consolidation.

"It can also be argued that because S&P has already downgraded SA to sub-investment grade, they will be more willing to give government more time to address the prevailing issues before acting further."

*This article was updated at 10:15 on November 20, 2018, to include comments from Mike van der Westhuizen.

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