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Sustainable economic growth in South Africa

Sustainable economic growth in South Africa

May 19, 2014

Over the past two years South Africa’s sovereign rating has been downgraded by three international ratings agencies, Fitch and Standard and Poor’s (S&P) to BBB and Moody’s to Baa1. Though Fitch put the rating on a stable outlook, both Moody’s and S&P have placed their ratings on a negative outlook.

Following the recent elections, government’s credit rating is under scrutiny once again by these rating agencies. Whether this is negative or positive is highly dependent on whether certain issues the country is facing is addressed or progress is shown over the coming months.

This is according to Marc Joffe, Managing Director of Global Credit Ratings (GCR), who says a further downgrade could be hugely detrimental to the economy.

He says, with the African National Congress (ANC) recently maintaining its majority vote there isn’t an anticipation of major reshuffling in cabinet, and therefore the focus from government over the coming months should be on implementing policies to grow the economy and create jobs. “Specifically, government’s absolute commitment to the National Development Plan 2030 (NDP) and ability to implement will be closely monitored and evaluated.”

“South Africa needs to instil confidence in local and foreign investors, through the implementation of policy measures that revive the relatively stagnant economy and achieve meaningful job creation. The pace of their implementation is also crucial in terms of boosting investor confidence and reviving GDP growth,” explains Joffe.

He says continuing strikes and wage demands are having a hugely detrimental effect on the local economy, as well as South Africa’s image around the world. “The fact that the platinum strikes have endured for several months without meaningful government intervention to remedy the situation is likely to be quite negatively perceived by foreign investors. This, in turn, could dictate the degree of comfort they have regarding future investment in South Africa,” explains Joffe.

Joffe advises that more positively, is that government have largely met their revenue forecasts and have demonstrated, even though marginally, some ability to reign in expenditure. “Government would be expected to continue to maintain this positive trend.”

He says a further downgrade will raise the cost of borrowing for both South Africa and state-owned entities.

“Interest payments are one of the fastest growing expenditure items over the next three years, rising to R140-billion in 2016/17, and we cannot afford to spend more on interest costs if we want to maintain current levels of social spending and fund the vast infrastructure investment initiatives. This is particularly crucial given that the revenue base is not expected to advance at a sufficient rate over the medium term, given subdued GDP expectations.”

Joffe says ratings agencies play a hugely important role around the world, in helping investors, fund managers and other stakeholders, to understand the risks facing companies and their financial position. “A further downgrade could be the difference in whether the country will still be an attractive investment opportunity for these stakeholders.”

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