#JunkStatus: The good, the bad & the ugly (Yes, S&P found some good)
EWN unpacks why Standard and Poor's downgraded South Africa's credit and currency rating, and what you need to know.
JOHANNESBURG - An economic bombshell, just days after a seismic political moment in the form of a Cabinet reshuffle, has shaken South Africa, leaving the rand, business and consumers reeling.
While President Jacob Zuma revealed only limited details on why he sacked five ministers and two deputy ministers (including Pravin Gordhan as Finance minister) late on Thursday night - and all indications are that he won't say much more - ratings agency Standard and Poor's Global (S&P) has been more forthcoming about why it downgraded the country's credit rating to "junk status".
On Monday evening local time, S&P announced that it had downgraded South Africa's credit rating to BB+ from BBB-, while it had lowered the currency rating from BBB to BBB-.
Here's what you need to know:
1) S&P is concerned about Zuma's cabinet reshuffle.
In fact, it's so concerned it started its statement with these words: "In our opinion, the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes."
This is the crux of the matter.
The statement further says: "The downgrade reflects our view that the divisions in the ANC-led government that have led to changes in the executive leadership, including the finance minister, have put policy continuity at risk. This has increased the likelihood that economic growth and fiscal outcomes could suffer."
This brings us to the second point.
2) The poor financial performance of several parastatals could place greater strain on government.
S&P says the credit rating downgrade is also driven by its "view that contingent liabilities to the state, particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner."
It doesn't stop there.
"Other state-owned entities that we think still pose a risk to the country's fiscal outlook include national road agency Sanral (not rated), which is reported to have revenue collection challenges with its Gauteng tolling system, and South African Airways (not rated), which may be unable to obtain financing without additional government support. While governance reforms have proceeded at the airline, Eskom still has to complete its board appointments and appoint a permanent CEO. Broader reforms to state-owned enterprises are still being discussed and we do not foresee implementation in the near term."
3) Back to Zuma and the ANC. Government and ANC divisions could scare business into inaction, denting investor confidence.
This one isn't that surprising with recent business and consumer confident indicators remaining depressed.
S&P believes could eventually lead to "increases in real interest rates".
What the statement says: "Internal government and party divisions could, we believe, delay fiscal and structural reforms, and potentially erode the trust that had been established between business leaders and labour representatives (including in the critical mining sector). An additional risk is that businesses may now choose to withhold investment decisions that would otherwise have supported economic growth. We think that ongoing tensions and the potential for further event risk could weigh on investor confidence and exchange rates, and potentially drive increases in real interest rates."
4) Slow economic growth.
StatsSA recently announced that the South African economy contracted by 0.3% in the fourth quarter of last year, contributing to marginal growth of just 0.3% for 2016.
And while economists have been telling us GDP is likely to improve - albeit from an extremely low base - that was BEFORE President Zuma's dramatic Cabinet reshuffle changed the game.
This is how S&P views South Africa's prospects of GDP growth: "South Africa's pace of economic growth remains a ratings weakness. It continues to be negative on a per capita GDP basis. While the government has identified important reforms and supply bottlenecks in South Africa's highly concentrated economy, delivery has been piecemeal in our opinion. The country's longstanding skills shortage and adverse terms of trade also explain poor growth outcomes, as does the corporate sector's current preference to delay private investment, despite high margins and large cash positions."
It's not all bad...
5) The South African Reserve Bank is a shining light.
S&P has listed South Africa's "monetary policy flexibility" as an "important credit strength", while noting the Reserve Bank's "independence" too.
We consider South Africa's monetary policy flexibility, and its track record in achieving price stability, to be important credit strengths. South Africa continues to pursue a floating exchange rate regime. The South African Reserve Bank (SARB; the central bank) does not have exchange rate targets and does not defend any particular exchange rate level. We assess the SARB as being operationally independent, with transparent and credible policies.
But it's mostly bad...
6) It could get worse.
So while South Africa has been thrown in the credit rating trash can, the scary (or hopeful) point is that we haven't hit rock bottom just yet.
But S&P warns this could change in future:
"The negative outlook reflects our view that political risks will remain elevated this year, and that policy shifts are likely which could undermine fiscal and growth outcomes more than we currently project.
If fiscal and macroeconomic performance deteriorates substantially from our baseline forecasts, we could consider lowering the ratings."
7) But maybe, just maybe, it could get better...
If you were looking for some hope you'd have to wade through 1,299 words of woe before finding anything resembling hope.
"We could revise the outlook to stable if we see political risks reduce and economic growth and/or fiscal outcomes strengthen compared to our baseline projections."
We'll have to wait and see.
PS: Moody's is expected to release its own statement SA's credit rating later this week.