S&P ratings call shows investor sentiment changing - CEO


Ratings agency Standard & Poor’s (S&P) decision to keep the outlook of SA’s sovereign debt rating at stable is a positive development and will help rebuild confidence in the country, said Nedbank CEO Mike Brown.

Late on Friday, S&P affirmed South Africa's local currency debt at "BB+", and foreign-currency debt at "BB", the second grade of junk status, with a stable outlook.  S&P noted the considerable economic and social challenges the country is facing. “South Africa's economic growth remains tentative, and the government's debt burden continues on a rising path,” the S&P report read.

Brown said the fact that one of the key ratings agencies maintained a stable outlook on South Africa’s creditworthiness is encouraging and suggests international investor sentiment is changing.

“But it is now more critical than ever that we avoid complacency and commit to the challenge of restoring growth, creating jobs and addressing inequality.” 

Brown said it is important to follow through on actions to address financial risks at state-owned enterprises, particularly Eskom.

S&P flagged debt servicing costs which remain close to 12% of revenue as well as unbudgeted public sector wage agreements and support for troubled SOEs.

South Africa will have to convince S&P the insolvency issue at SOEs is resolved and that reforms in governance, business strategy and reconstruction of balance sheets are implemented to ensure long-term financial sustainability of the entities, said Brown.

Weak fiscal position

Investec Chief Economist Annabel Bishop also noted S&P’s warning on the country's "weak fiscal position".

She said S&P could change the outlook from stable to negative and downgrade the country’s rating further if there is a deterioration of the fiscal position through increased spending and weaker economic growth.

“SA still has a long path before regaining its lost S&P investment grade ratings,” Bishop said in a report.

She explained that SA is vulnerable to potential large-scale capital outflows, particularly from equity and bond markets. Although S&P expects the current account deficit to be higher, at 3.2% of GDP between 2018 to 2021, the size of the deficit is lower compared to historical standards, Bishop explained.

“It has been funded predominantly via volatile portfolio inflows. Foreign investors hold nearly $20bn in government local currency debt. Such flows can be susceptible to changes in foreign investor sentiment, and interest rates in the US are forecast to rise.”

Investec does not expect any downgrades by the three main ratings agencies, S&P, Moody’s and Fitch. S&P will review SA again on November 23, Moody’s on October 12 and Fitch would more or less be the same time, said Bishop.

Analysts from NKC Economics said that S&P’s decision was in line with market expectations. But SA still faces “significant challenges” and more must be done before an upgrade from sub-investment grade is on the cards. Economic growth and improved fiscal outcomes are needed for any potential upgrade, NKC said.

“S&P will keep a close eye on developments relating to the land reform debate and that a positive outcome of the process would be vitally important for future rating actions.

“While Ramaphosa has done well on many fronts in his first 100 days as President, momentum needs to be maintained and more needs to be done.

“The impact of years of economic mismanagement cannot simply be reversed in the short term and the country’s fiscal challenges will remain a constraint for years to come.”

NKC warned that uncertainties around land reform and disappointing economic growth in the first quarter pose risks in attracting investment. Policy uncertainty with regard to land reform could put a spanner in the works for President Cyril Ramaphosa’s four investment envoys, said NKC.

In a statement issued by the CEO Initiative on Saturday, the organisation noted the progress made since S&P’s last review in November 2017 and added that more work needs to be done to regain investment grade status.

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