Only Inches away from Junk Status Economy

It is symptomatic for political statements these days that those judgingly pointing fingers at others are mostly the culprits and reason for South Africa’s precarious situation.The parliament is worse than the Muppet Show and the Chief Muppet holds the Speaker of the House responsible, while happily cackling when he kicks legislature and jurisprudence into their shins. But worse than the political circus is the economy. Thousands of affluent tax-payers leave for Mauritius and the inevitable is only a stone throw away as it appears to be just a matter of time before South Africa’s credit rating is cut to junk.

S&P Global Ratings will lower the nation’s rating to non-investment grade by the end of this year, according to 12 of 13 economists and analysts surveyed by Bloomberg. Four see the downgrade to BB+, which will put South Africa on par with Turkey and Indonesia, coming as early as next month. All 13 analysts predict Moody’s Investors Service, which rates the nation one level above S&P, will cut its assessment by December.

“The concern is that we continue to have disappointing growth that ultimately adds to fiscal pressures,” Elna Moolman, an economist at Macquarie said by phone on Wednesday. “As things stand now, I think they will downgrade us.” Both the National Treasury and South African Reserve Bank forecast the economy will expand less than 1% this year, the slowest pace since 2009, as depressed commodity prices and low demand from major export markets weigh on output.

h3. Slow Growth will reduce Tax Revenue

Lacklustre growth will limit tax revenue and make it more difficult for the Treasury to meet its target of reducing the budget deficit to 2.4% of gross domestic product in the year through March 2019, from 3.9% last year, and limit gross debt to about 50% of gross domestic product. Political upheaval, which has led to calls for President Jacob Zuma to resign, is compounding the economic risks. In December, Zuma replaced Finance Minister Nhlanhla Nene with a little-known lawmaker, sending the rand and bonds plunging. In March, the nation’s top court found the president violated the constitution when he refused to abide by a directive from the graft ombudsman and last week the High Court in Pretoria ruled prosecutors erred when they dropped corruption charges against Zuma shortly before he became president in 2009.

h3. Investors already consider SA risky

Investors already consider South Africa more risky than some junk-rated countries. The cost of insuring against a default by the government for five years using credit-default swaps is 38 basis points higher than for Russia, which is rated speculative grade by both S&P and Moody’s, according to data compiled by Bloomberg. The only major emerging market with contracts more expensive than South Africa is Brazil, which is in the worst recession in a century and where President Dilma Rousseff is facing impeachment.

Moody’s put South Africa’s credit rating on review for a downgrade in March because of a weaker growth and fiscal outlook. There is a “real possibility” that the nation’s debt assessment will be cut, S&P managing director for sub-Saharan Africa, Konrad Reuss, said last month. The central bank said on Tuesday there was a medium to high probability that South Africa’s debt will be downgraded to non-investment grade. That may lead to capital outflows, increase the cost of funding and cause spreads on credit-default swaps to widen, the bank said.

h3. Political Infighting will thwart Efforts

The government must work with business and labour to avert a downgrade, said Finance Minister Pravin Gordhan, who was reappointed to the post which he had held until 2014 after Zuma came under pressure from business and political leaders. “We remain confident that our fiscal targets for the period ahead will be met, yet it is clear that bold steps need to be taken to address structural barriers to faster growth,” Gordhan told lawmakers in Cape Town on Wednesday. Political infighting will stymie efforts to implement reforms, such as changes to labour laws, that are needed to spur growth, according to Per Hammarlund, chief emerging-market strategist at SEB SA in Stockholm.

“With growth slowing to a crawl of 0.5% this year and only slightly faster next year, debt will continue to rise, closing in on 60% of GDP,” Hammarlund said by e-mail. “The ratings agencies simply cannot overlook the government’s inability to address the problem.”

The question remains: when will the Captain of the “MS South Africa” understand that the ship has stranded already and therefore the laws of the sea do not apply anymore, hence the Captain should leave bridge and ship first and not stay until nobody is on the ship anymore ….

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