During 2015 SA’s sovereign credit rating was downgraded to BBB-. Earlier this month we survived a new ratings period, where our rating and outlook was held constant. What does this actually mean, and how have the rating agencies decided on this rating. We have all been hearing about this over the past months, but unless it is explained in laymen terms, then it really isn’t that easy to understand.A BBB- rating means we, South Africa is still classified as “Investment Grade”, but with a negative outlook to our economic environment. Therefore, offshore investors will perceive us as a more ‘risky’ investment. The rating agencies have, however, outlined why we are regarded as such, and what needs to be done in order to prevent a further downgrade in December 2016 to Junk Status. The issues of concern are as follows:
1. The Lack of Economic Growth. The prospects over the next 12 months is around 0.5%-0.6% GDP. This suggests that the economy is lethargic, and a needs a ‘jump start’. This weakness is not just due to SA, there are external factors also affecting our growth. The world economy is in a slump.
Commodity demand is down worldwide, China’s growth has slowed down, and the ‘First World’ economies are still stuttering. This all has a negative effect on growth prospects for all world economies. Locally the drought has brought hardship and reduced crop yields. Unfortunately, this is a factor that is unavoidable, but it has the negative effect on the economy nonetheless.
2. Government Finances are not looking good at the moment. Government debt has almost doubled over the past 6-7 years. If this is not better controlled, Government will battle to fund their debt repayments, and the interest charged on this debt. A small positive is that very little of the debt is foreign currency based, compared to India which makes them a greater credit risk than us.
South Africa needs to attract foreign investment. With our high interest rates and weak rand, this should attract investment into our Bond and equity markets. The problem is this investment can be very Junk Status – what does it mean? Harbour Wealth Client Newsletter June 2016 Sean Quigley Senior Wealth Planner, JHB
3. Government Funding of Public Corporations. Eskom; SAA and SANRAL as examples. Ratings agencies see these companies as not having good management, and the over funding can eventually overwhelm the budget. A possible solution is to involve the private sector here, either through investment or possible sale. The important factor is that the Minister of Finance is addressing these issues.
4. Structural factors need to be addressed. Inequality exists across the board, leading to tension. Income inequality is obvious, as well as wealth distribution. The Agencies see these issues as a major problem.
With this said, the Agencies see positive factors that exist in SA that definitely offset the concerns that they have. This is an indication that we are doing something right.
i. Reforms are in place, which were addressed in the 2016 Budget, to control Government spending, actually putting a ceiling to this.
ii. We have strong Institutions in the Public Protector and our Judiciary.
Giving more confidence that intervention from government is unlikely.
iii. The Independence of the Reserve Bank is viewed as very positive. The fact that they are able to make decisions independently of public policy, giving the Agencies confidence.
In conclusion, currently we are on the road to a downgrade, unless we increase the growth prospects for SA. Confidence in SA must return!!
Complacency cannot be allowed to exist. SA needs to be more proactive around the future of the economy. With the right people in the finance department, and clear leadership from government, this can be possible. Combining the recent updates from all three of SA’s Ratings Agencies, it is clear that the risk of a downgrade remains significant. SA needs to manage its finances more efficiently and implement policies to lift economic growth. This is no easy task. History has shown that when a country is downgraded to Junk Status, it takes on average a minimum of 6 years to get back to Investment Grade. Six years is a long time.
With all the heightened anxiety and volatility, there can be no better time to seek sound financial advice from a qualified Wealth Advisor. At Harbour Wealth we take our jobs seriously and constantly monitor your investments with us. As such we have taken a short to medium term tactical play in the fixed interest market, whilst diversifying ourselves elsewhere to reduce volatility and maximise long term capital gain. We continue to keep a very close eye on costs, don’t forget all things being equal, a 1% savings in fees over 20 years could result in a 22% increase in the growth of your investment. If you would like more information, please contact your Wealth Planner or visit our website
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