Credit rating: ‘Zupta’ spells trouble

Political tensions – including those that have emerged following the Constitutional Court ruling on Nkandla and subsequent debates in parliament to impeach President Jacob Zuma – risk diverting the government’s attention away from much needed policy implementation to a focus on politics, Standard & Poor’s has warned.

“Government needs to refocus the issues on policy implementation, which will help growth,” said Gardner Rusike, associate director for sovereign ratings at S&P.

South Africa’s weak growth remains the primary pressure driver on the country’s credit rating, Rusike, speaking at an S&P event on Wednesday, said.

The ratings agency currently has South Africa at BBB- (one notch above sub-investment grade) with a negative outlook.

Factors that could trigger a revision in the outlook to stable include better policy implementation, improved business confidence and more private sector investment, Rusike notes.

These factors would in turn lead to higher GDP growth, which could stabilise ratings, he said.

Addressing these and other issues, including those around electricity supply and labour market instability, “could help us to believe in the medium- to long-term growth prospects of the economy,” Rusike said.

“There is a lot more that can be done on the domestic factors,” he added.

Rusike said that the Constitutional Court judgement underscores the important role of institutions in the country, which is positive for S&P’s institutional assessment of the country.

Fiscal consolidation forecasts could also help South Africa’s rating, but they may be challenging to achieve if GDP growth remains low and tax revenues come under pressure as a result, Rusike commented.

Other risks to the fiscal consolidation path include a rising exposure on the part of government to state-owned enterprises (SOE) with weak balance sheets and rising debt servicing costs, as domestic interest rates increase.

“The starting point of fiscal analysis could show an improvement,” Rusike said.

In his 2016 budget speech, Finance Minister Pravin Gordhan forecast a budget deficit of 3.2% of GDP for the 2016/17 tax year, a reduction from the 3.9% achieved in the 2015/16 tax year.

South Africa’s slower growth preceded the current global downturn, according to Jean-Michel Six, MD and chief European economist at S&P.

“The drought, power shortages and the decline in commodity prices have all been weighing on growth in this economy, but I would like to stress that unfortunately growth already underperformed other economies in the previous period,” Six said.

S&P forecasts GDP growth of 0.8% in 2016 and 1.7% in 2017.

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