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JIMMY MOYAHA: Ratings agencies – they’re always in focus. They’re always looking out and seeing how we are planning our lives as South Africans, or rather how the government is overseeing what it is charged with overseeing. The latest from that stable is that Fitch has left us unchanged at below investment grade. I think it’s three notches below investment grade.
To help us make sense of this is one of my favourite economists, the chief economist at Rand Merchant Bank, Isaah Mhlanga. Good evening Isaah, nice to speak to you as we start off the new year. Fitch has left us unchanged, still BB-minus, three notches below investment grade. What does that mean for us?
ISAAH MHLANGA: Good evening to you and your listeners. Look, it’s not an unexpected decision.
Obviously, if we look from where we are coming in relative terms to where we are going, things look slightly positive in the sense that we have some reprieve as far as the impact of load shedding is concerned. The business sector has been much more resilient even though we still have load shedding; we’re still going to have it for some time.
But we are also starting to see some signs of the beginning stages of resolving the transport and logistics issues – which would be positive for economic growth going forward. [That] will help to cushion the blow that we have seen on businesses.
JIMMY MOYAHA: Isaah, some of these concerns that you mentioned are concerns that we’ve had persist since pre-pandemic even, in the form of things like load shedding. I know that Fitch also highlighted things around needing to stabilise the debt levels in the country, needing to manage the inequality situation in South Africa, the R50 billion they expect that Treasury will provide to Transnet in the form of a bailout or financial assistance, or whatever you want to call it in this day and age.
What do you think are going to be some of the concerns that are going to stick with the rating agencies as we’re going to 2024?
Do you think elections are another thing that they’re going to be looking at? I noted Fitch said something around the fact that they expect the ANC to lose power.
ISAAH MHLANGA: Look, elections would matter insofar as they can influence economic policy. So if the outcomes are such that we have a coalition that might result in unstable economic policy, that will matter for the credit rating agencies because ultimately it’ll have an impact on business confidence and the investment prospects of the country.
But in themselves, I don’t think they have a big bearing if they don’t influence economic policy in a way that makes the country an uninvestible economy. These are things that they look at in all countries. It’s not unique to us.
Elections come and go, so we shouldn’t overemphasise the elections as something that is going to derail economic prospects for the country.
We just need to look at what the government is going to do as far as implementing the reforms that are required to enable the business community to invest in the economy and create jobs.
JIMMY MOYAHA: Isaah, speaking of economic prospects, growth forecasts are looking quite grim regardless of which institution you’re looking at. Fitch is no different. They forecast less than 2% growth for South Africa. Are you seeing sense in that number? Are you seeing a different number from your perspective?
ISAAH MHLANGA: Look, I think for everyone who looks at the economy, we end up much closer together.
We have about a 1.2% expectation for this year, and that’s just a slight improvement from the nearly 1% last year that we estimated. So these economic growth expectations are way too low to, one, stabilise debt, and two, reduce unemployment.
So it’s not enough. We need economic growth north of 2% on a sustained basis. In fact we actually need 3% economic growth to reduce our unemployment rate.
So we are still at an environment where our economic growth remains quite limited, which is why we need all these reforms to sort out our energy issues, to sort out our logistics issues, but also some low-hanging fruit that we can benefit from and sort out safety and security to boost tourism.
JIMMY MOYAHA: Some easy wins that we really should be taking advantage of. Isaah, how are we stacking up compared to our emerging market peers? Is South Africa still in a fairly strong position if we have to compare it to the likes of Turkey, Brazil and other emerging market regions, where we look at things like growth versus inflation, versus the unique restrictions that plague South Africa, like load shedding and the things that we’ve discussed?
ISAAH MHLANGA: It really depends on what you look at. If you look from a fiscal perspective, particularly if you look at our debt-to-GP ratio, we are on the high side, which means on the wrong side of the emerging market pack.
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We are one of three countries that have rising debt-to-GP ratio expectations up to 2028. The other ones are India and China, but they have much better prospects from an economic growth perspective.
But if you look in terms of the structure of the economy, our capital markets are deep.
Our debt structure is also favourable, because we have our debt mostly in local currency, which means we have less currency risk as far as our repayment of debt is concerned. That helps us quite a lot in relative terms.
But then if you look in terms of the micro structure of the economy, those sectors that underpin economic growth – sectors such as transport and logistics, energy water and agriculture – we tend to struggle a bit. We don’t fare as well, which is where the effort needs to be focused to make sure that the micro structure of the economy is quite supportive and makes the economy quite competitive globally.
JIMMY MOYAHA: Isaah, if we look at the rating agencies’ expectations – you’ve touched on a lot of what they would want to see – do you have any particular thoughts around what they would want to see come out of the budget speech that we’re expecting. As we said earlier, Fitch has already outlined that they expect to see another Transnet ‘assistance’ or bailout – I don’t even know what the terminology is to use, but it is a bailout at the end of the day.
Do you think that we will see something to the tune of assistance for the likes of Postbank, and wanting to stabilise debt? Is it going to be pretty much the same story we heard in the Mid-term Budget Policy Statement [MTBS]? And, if it is, do you think rating agencies are expecting that or will be disappointed by that?
ISAAH MHLANGA: Look, I think if government comes with the same, or slightly better than what they outlined in the budget in the MTBPS last year, where a fiscal consolidation path with primary surplus is expected, I think that will be just sufficient to ensure that we don’t see any negative action from credit rating agencies.
But if government comes and says it actually can’t implement what it said in the MTPBS, and shows deteriorating expectations of the primary balance, that might come with a negative rating action.
So essentially credit rating agencies know exactly what government extension is. Government just needs to follow through and deliver exactly that.
JIMMY MOYAHA: You say negative rating extensions, and that concerns me because we’re already at BB-minus, which is three notches, if I’m not mistaken, below investment grade. Do you foresee us moving in any direction anytime soon? Again, we’re assuming a perfect world where we deliver the budget speech that’s needed, and all things work out. Do you think we could see even Moody’s – which has us a little higher than Fitch and S&P – give us a slight improvement in their outlook?
ISAAH MHLANGA: At the current moment for this year we don’t see a change.
In fact, if we look beyond this year, where we might see some reprieve from load shedding because of the potential fixing of existing power plants and improvement of the energy availability factor – which is what Eskom intends to do – we wouldn’t see a change.
But if there are any economic shocks that we can’t respond to properly [and] that end up derailing the economic prospects that have been projected so far, we might see negative rating action under that scenario.
But that’s not what we expect for this year.
JIMMY MOYAHA: Well, we’ll keep an eye on that. We’ll see how the budget speech turns out. You and I will probably touch base sooner or just before that speech, and around that conversation.
But thanks so much Isaah, for your thoughts. That’s Isaah Mhlanga, the chief economist at Rand Merchant Bank, sharing his thoughts on rating agencies and how they’re currently viewing South Africa – and what needs to change.
