Nuclear deal might push SA into junk
Things aren't looking up for Africa's second largest economy, with markets on edge awaiting the country's budget speech, on February 24.
This is according to Busisiwe Radebe, an economist at Nedbank Limited, who addressed a group of local business people attending an Ekurhuleni Business Initiative network meeting at the Ebotse Golf and Country Estate recently.
She painted a slightly grim picture of the coming year for South Africa and its potential effects on local businesses.
Among other concerns, Radebe raised the subjects of a looming credit ratings downgrade, the weaker-than-ever national currency and the repercussions of China’s slowing economic growth.
Radebe explained internal factors, such as that high costs of labour and electricity are part of SA’s problem, but uncontrollable events, including the country’s worst drought on record and the downturn in commodities prices, are also to blame.
She added that China’s slowdown in economic growth has affected SA heavily, as around 15 per cent of the latter’s exports go to the world’s largest consumer.
“There are quite a few schools of thought about China: one is that growth will pick up, another is that China’s growth numbers are fabricated and a third says growth will slow down,” Radebe said.
Credit rating agencies measure and determine the credit reliability and, with it, the investment grade of companies and countries across the globe.
Standard and Poor’s (SnP), Moody’s Investors Service and Fitch Ratings are the three most influential, with the largest global market share.
Currently, SA is rated by Fitch and SnP as only one level above junk status, which is essentially regarded as below investment grade.
“We have many investors who hold SA debt; if we’re downgraded to junk, they have to divest from us and sell our debt, which will weaken the Rand quite a bit and could have dire consequences for the economy,” said Radebe.
According to her, the big national budget deficit is another reason to be wary of the “big three”.
“We are at a scary point in the South African economy,” Radebe said.
“I think if the nuclear deal goes through, we will be downgraded to junk, because we can’t afford it at the moment.
“I hope [Pravin Gordhan] will hold it together in the budget speech by saying the nuclear deal is just preliminary and give a good overview of government finance.”
The economic expert went on to say inflation would be higher in 2016 and interest rates would rise to counter this.
“The Reserve Bank wants to halt inflation by upping the interest rate, but that affects the inflation only after about 18-24 months,” she said.
Continuing the streak of bad news, she added that Nedbank predicts the Rand will weaken more over the next two years, possibly reaching 18.21 for a dollar by the end of 2018.
Despite the negative forecast, Radebe said there are still opportunities for growth in the economy this year.
“Electricity (specifically renewable energy), tourism and export-driven industries could grow this year, because of the weak Rand, but industries too reliant on labour, commodities or imports won’t do so well,” she explained.
