South Africa’s sovereign rating is not out of the woods yet and the country has to “do the right thing” to avoid a credit downgrade.
This is according to Konrad Reuss, managing director of Standard and Poor’s (S&P) South Africa and sub-Saharan Africa. He was speaking during a panel discussion on the outlook for Africa, at Deloitte’s Africa 2017 Outlook conference on Wednesday.
He explained that South Africa’s rating hinges on three issues. The first of these is GDP and fiscal performance.
There are expectations for an improvement in GDP growth and improvements for the country’s fiscal performance.
“However, if there is no delivery it could put pressure on the rating,” he said.
The second factor is related to institutional strength. If there are signs of “weakening institutions” through the course of 2017 that will have a negative impact on policy frameworks, it will also put downward pressure on the rating, said Reuss.
He explained that institutional assessment would be impacted by matters like a Cabinet reshuffle, or disturbing news that would “put the brakes” on the economy and slow it down, driving away investment.
Finally, the risks emanating from government enterprises could put pressure on government’s fiscal position and debt position. This will also add pressure to the rating.
He said S&P would be keeping an eye on these factors.
“Again, do the right thing and do it while you go on contesting for your leadership.”
He was referring to the upcoming ANC leadership elections later this year.
In December, S&P kept South Africa’s sovereign rating at BBB- with a negative outlook.
Reuss added that 2016 saw a number of countries “flirting” with defaults. He said the view on emerging markets had changed compared to earlier years.
“Today we see much weaker ratings than we looked at a few years ago.”
Taking a bird’s eye view of Africa, Reuss said that in terms of institutional strength, none of the 17 rated African countries were strong, while only five were scored neutral and the rest were scored “weak”.
In terms of the economic measure, all were scored “weak”. As for external factors as a measure, the majority of African countries were scored as “weak”.
None of the African countries were “strong” when it comes to the fiscal budget measure.
In addition to these structural challenges, Reuss said that rising US interest rates pose a new challenge. These would result in high financing costs and debt levels, and it would be important to see how policymakers handle a stronger dollar.
Another factor is political risk and volatility around political risk, which will be influenced by upcoming national elections in some African countries. Local risks which may materialise through the course of the year may also have a bearing on ratings.