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Just how sticky is SA’s credit situation?

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There is no doubt that a downgrade to “junk status” will negatively impact South Africa’s economy, businesses and consumers.
While many brace themselves for the worst, Old Mutual Multi-Managers investment strategist Izak Odendaal offers an honest but refreshing outlook on the situation. In addition, Frank Lenisa, chief marketing officer at credit bureau Compuscan, provides insight into the way in which consumers are able to contribute to economic growth to steer South Africa towards greater stability and growth.
According to Odendaal, who was a guest speaker at Compuscan’s recent Credit and Decision Analytics Conference, the need for sustained growth is what separates South Africa from greater creditworthiness in the eyes of the three major international ratings agencies.
He says: “While the economic growth rate is expected to improve in the next two years, the likelihood of a credit ratings downgrade by at least one agency remains high, unfortunately.”
Moody’s did not issue a ratings decision as expected last week, and Fitch left South Africa’s ratings unchanged. However, Fitch changed the outlook on its rating from stable to negative, suggesting a downgrade to sub-investment grade status in 2017 is still a possibility.
“The most imminent risk is therefore that S&P Global cuts South Africa’s foreign-currency rating to ‘junk status’; however, our local currency rating is likely to remain at ‘investment grade’,” Odendaal says. “Most of government’s borrowing happens in local currency, thanks to the country’s large and sophisticated local capital markets – something that few emerging markets have achieved.”
The reality is that South Africa has not made much progress on reforms and initiatives to raise its economic growth rate on a sustained basis. The country has been hit by several shocks in recent years, including falling commodity prices, load-shedding, prolonged strikes, a severe drought and rising interest rates, to name a few. Yet, despite these challenges, Odendaal points out that the impact of these shocks is in the process of fading and that growth could normalise to pre-2014 levels.
Odendaal and Lenisa agree that one of the biggest contributing factors inhibiting significant economic growth is that South Africans lack confidence – an unsurprising result of the challenges that have reared their heads in recent years and during 2016, including a rise in the country’s unemployment rate to 27,1% as per Statistics South Africa.
Comments Lenisa: “To turn the current situation around, a strong focus needs to be placed on reinstating consumer and business confidence. One of the predominant ways that we, at Compuscan, see that happening is through entrepreneurship.”
Lenisa explains that entrepreneurial initiatives have the power to generate an income, to create employment opportunities and to stimulate a positive ripple effect. For this reason, Compuscan encourages responsible business-to-business lending to provide entrepreneurs with the means to put their business plans into action.
“Credit is a resource that, when managed well, not only enables the start-up and growth of businesses, but aids the proper functioning of the economy.”
Should a ratings downgrade occur, higher interest rates could apply in which case government would be required to spend more to service its debt. As such, spending in other important areas would need to be sacrificed, Odendaal explains. He additionally raises the concern that a downgrade could result in a weaker rand which would push up inflation.
However, markets are typically forward-looking and probably already largely reflect the risk of a downgrade. It is his hope that ratings agencies will be broadly satisfied with positive aspects that took focus this year, including South Africa’s institutional strength and Treasury’s plans to trim spending and raise taxes.
Lenisa concludes: “Even if South Africa manages to escape a downgrade in six months’ time, its proximity to the ‘danger zone’ is good enough reason for us to work hard towards contributing to the growth of the economy and thus the country’s creditworthiness.”