Junk status could be avoided
Here’s why I think South Africa is at risk of a June credit downgrade.
![](https://images.caxton.co.za/wp-content/uploads/sites/26/2016/02/robbyp_06470.jpg)
A unanimous sigh of relief ensued in our currency plus our stock markets, after (by some miracle) we avoided a junk rating by the big three agencies: Moody’s, Fitch and Standard & Poor’s.
We have however, been placed on negative watch, but what does this all mean?
Simply put, Standard & Poor’s Ratings Agency’s assessment of BBB- is the lowest investment grade level.
The next step down is ‘junk’.
The celebration of avoiding sub-investment grade ratings was short lived, when our third quarter GDP growth came in at only 0.2 per cent, just days after the announcement.
Over 12 months, that means growth or expansion of 0.7 per cent from a year earlier – which is a shocker.
Here’s the problem…
No output
The manufacturing sector contracted sharply and that’s not what the market wants to see, after just having avoided ratings downgrades.
Manufacturing now accounts for only 13 per cent of the economy, down from when it used to be 25 per cent 20 years ago.
In our country, when manufacturing contracts, government cannot ‘boost’ output.
Besides the fact that our own political turmoil has distracted from the already proposed reforms to boost our economy (and I still believe we can), the economy will probably expand at the slowest pace this year since a 2009 recession.
When manufacturers aren’t producing, I can guarantee you they aren’t hiring either.
Our unemployment rate is now sitting at 27 per cent.
Pravin Gordhan can’t do anything without growth.
Without growth, it will be nearly impossible for the Finance Minister to meet his pledge, to narrow the budget deficit to 2.5 per cent of GDP by 2020.
The ratings agencies need to see that we are starting to implement policies that will speed up growth.
If they don’t get that sort of confidence, it’s junk in June.
How do we avoid being ‘junked’?
Let’s be frank, things are pretty damn bad at the moment.
There’s a high probability of a downgrade in June, but we can avoid it.
If government’s wasteful spending stops and they leave the Finance Minister to focus on his ultimate task: of getting us out of the ‘dwang’ – that would help.
Spending can be concentrated on infrastructure and job creation.
Government spending in the right areas, will allow Gordhan to implement his plans and measures to ‘boost’ much-needed economic growth, which will in turn ‘boost’ employment.
We only need to stick to the basics, to avoid June junk status.
Government most certainly has a lot of work to do, but from an emerging market ‘investment case’ point of view, avoiding a downgrade will do wonders for our market.
Our currency will appreciate and our market suddenly becomes a much sexier proposition for investors.
Avoiding a downgrade in June, would signal a potential reversal in negative economic momentum and you’ll want to be invested in South Africa, when that happens.
At the end of the day, it’s not all doom and gloom.
Happy holidays, Benoni.