11 December 2015 – South Africa’s recent rating downgrade has been precipitated by government caving into demands by protesting students for a 0% university fees increase, load shedding, and economic turmoil among South Africa’s BRICS partners.
With the possibility of a recession increasing by the week, the likelihood of South Africa being further downgraded to junk status is on the horizon. Media monitoring company, Newsclip analysed the media coverage on the credit rating in order to provide some insights.
Written and compiled by Nadine Schlebusch\
Contextualising the Fitch downgrade
South Africa’s recent rating adjustment by Fitch from BBB to BBB- has put the country just one notch above so-called “junk status”. Furthermore, Standard & Poor’s have adjusted their outlook from stable to negative, which generally signals a future downgrade. The last time South Africa had a junk credit rating from Moody’s was from the period 1995 to 1999. In general, the country has been viewed as having adequate payment capacity over the last 15 years1. Fears South Africa might also be facing a recession has been quelled for the time being as the country narrowly avoided two consecutive quarters of contraction.
Economic impact of protests
The credit downgrading has been put down to various factors, not least of which was the recent student protests. Students, angered by the announcement of double-digit fee increases, shut down higher education institutions across the country. After rejecting a proposed 6 percent increase, students marched on the Union Buildings in Pretoria demanding a zero percent fee increase. Government capitulated to these demands. But, according to journalist and historian R.W. Johnson2, government gave in to the 0% increase before considering where the money to pay for the fees deficit was to come from. The impact of the 0% fees increase is having a knock-on effect on the structural expenses that government needs to budget for in 2016, according to Carin Smith3 for fin24. Higher Education Minister Nzimande indicated that an additional R19.7bn, in addition to the current baseline, would be needed to fund higher education appropriately.
The recent student protests have also worked to highlight government spending and whether they are allocating resources efficiently, according to Stella Mapenzauswa4 from Reuters. Whilst students were protesting outside parliament, ex-Finance Minister Nene announced a 10.1 percent increase in spending on salary increases for government workers. Widespread unhappiness from opposition parties followed as they feel this is a drain on the budget that yields no particular returns. Barclays Africa economist, Peter Worthington, agreed with opposition parties saying that “a smaller public service would free up fiscal resources for other priorities.” In a similar action, government agreed to demands by public service workers for increases upwards of 10%. The wage agreement between government and service workers is estimated to cost R13bn more than what has been budgeted for. Government’s recent responses to pressure groups
In a similar action, government agreed to demands by public service workers for increases upwards of 10%. The wage agreement between government and service workers is estimated to cost R13bn more than what has been budgeted for. Government’s recent responses to pressure groups shows that it has little backbone, according to Johnson, and leaves it open to be pressured by any well-organised group. Despite the fact that labour unrest has become ordinary in the lives of South African citizens, it is having a negative impact on investor confidence and economic performance. Labour unrest, according to Schutte and Lukhele (2015: 72), is set to remain part of South Africa’s civil landscape due to its social and historical context. It adds to economic instability as it causes productivity slowdowns which affects government revenues (Schutte and Lukhele, 2015: 73). Electricity woes
Electricity woes
Low growth and high unemployment are the two main culprits rating agency S&P highlight as fiscal challenges along with increased social protests by unsatisfied citizens. According to Financial Mail writer Ntsakisi Maswanganyi5, South Africa’s economic growth was negatively affected in the first half of the year by continued load-shedding. The impact of load-shedding is most obviously seen in the mining sector. As the country relies on exporting precious metals to finance its current account deficit, the negative impact on production has led to a depreciation of the rand. Eskom has indicated that load-shedding will be a reality for only a few years, but experts say this is optimistic. Continued energy problems will have a draining effect on the economy, affecting both national businesses as well as confidence of international investors.
Although load-shedding has not affected the country for the last few months, this is not good news, according to writer James-Brent Styan6. The decrease in peak demand for electricity is an indication of the crisis the economy is currently experiencing, Styan argues. Peak demand in 2013 was approximately 36 000MW, 2014 was closer to 33 000MW, and today, peak demand is closer to 30 000MW. Figures indicating economic growth read the same as the electricity data, with ex-Finance Minister Nene revising the economic growth forecast down to 1.5 percent.
BRICS
The current slowdown in China’s growth has also affected South Africa’s economy negatively due to a decrease in demand. According to Zeleza (2014: 157) China has become more important to Africa’s total world trade than Africa to China. Since 2008, China represented more than 10% of Africa’s total world trade. Similarly, Hess and Aidoo (2015: 71) say that despite unpopular sentiment towards China, the country directly affects the health of the South African economy.
Investment risk in South Africa is compared to that of fellow BRICS member Russia. Russia is currently junk-rated. South Africa’s cost of insuring against default has narrowed to only 14 basis points less than protection for Russia, according to Carin Smith. Despite the fact that Russia is currently facing a recession, is involved in two conflicts and is under international sanction due to its fighting in the Ukraine. South Africa’s debt – as a percentage of its economy – is estimated to be twice that of Russia and expected to remain at that level for the next five years. Government is said to be struggling to keep debt less than 50 percent of gross domestic product. According to Rene Vollgraaff7, South Africa is also considered higher risk for investment than lower-rated Turkey who are affected by the Syrian conflict and faces possible sanctions by Russia.
Brazil, one of the BRICS countries, has more financial turmoil than South Africa. Brazil’s fiscal deficit is 10% of GDP whereas ours is less than 4%. But Cees Bruggemans8 is pessimistic about the way South Africa is going due to ongoing political unrest and the general negative sentiment towards government and its policies. According to a senior portfolio manager at Jyske Bank in Denmark, South Africa could start going the same way as Brazil where the government was not able to implement the correct reforms.
Junk status?
"I’ve heard it said that we are sleepwalking into a downgrade," Konrad Reuss, Standard and Poor’s MD in South Africa said. The way in which the government is handling its finances is causing concern for many as government debt is increasing at alarming rates. Debt-servicing is becoming the dominant factor in the spending priorities for government, which is having a negative effect on spending on other activities.
If South Africa was downgraded further, to junk status, the consequences would be that some global investment funds would have to exclude the country, Larry Claasen9 warns. The current uncertainty around South Africa’s economy is causing businesses to slow down their expansion and are rather looking to opportunities abroad further entrenching instability.
A rating downgrade would have widespread negative consequences as it makes raising money more difficult, but also increases the interest rate on debt repayment.
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1 Frikkie Maré. ‘Will South Africa end up on the credit rating rubbish dump?’
FarmBiz December 2015.
2 R.W. Johnson. How Long Can South Africa Survive? The Looming Crisis. November 2015.
3 Carin Smith. ‘Expect two rate hikes in 2016 – economists.’ Fin24.com 11 November 2015.
4 Stella Mapenzauswa. ‘Spotlight on expenditure as South African budget comes under strain.’ Reuters 27 November 2015.
5 Ntsakisi Maswanganyi. ‘Catalogue of woes feeding into each other.’
Financial Mail Investors Monthly November 2015.
6 James-Brent Styan. ‘Why no load-shedding is bad news…’
Finweek 12 November 2015.
7 Rene Vollgraaff. ‘SA more risky than Turkey as Fitch downgrade looms.’
Bloomberg 4 December 2015.
8 Cees Bruggemans. ‘SA & Europe on the Ropes.’
Automative Business Review 7 November 2015.
9 Larry Claasen.
‘South Africa ‘sleepwalking into a downgrade’ BDLive 27 November 2015.Hess, S. and Aidoo, R. 2015.
Charting the Roots of Anti-Chinese Populism in Africa, The Political Economy of the Asia Pacific. Springer International Publishing: Switzerland.
Hess, S. and Aidoo, R. 2015.
Charting the Roots of Anti-Chinese Populism in Africa, The Political Economy of the Asia Pacific. Springer International Publishing: Switzerland.
Paul Tiyambe Zeleza (2014) The Africa-China relationship: challenges and opportunities, Canadian Journal of African Studies, 48:1, 145-169
Schutte, M. and Lukhele. S. 2015.
'South Africa’s culture of labour strife – prolonged violent strikes and distorting a means of democratic expression and undermining social and economic security.’ Africa Conflict Monitor, 71 – 77.