Rating agencies give cautious vote of confidence as South Africa holds its breath

Fitch Ratings has affirmed South Africa’s long-term foreign and local currency Issuer Default Ratings (IDRs) at BBB- and BBB, respectively. The issue ratings on South Africa’s senior unsecured foreign and local currency bonds are also affirmed at BBB- and BBB, respectively. The outlooks on the long-term IDRs are stable. The short-term foreign currency IDR is affirmed at F3.

Fitch has also affirmed the country ceiling for South Africa and the common country ceiling of the Common Monetary Area of South Africa, Lesotho (B+/stable), Namibia (BBB-/stable) and Swaziland at BBB. The rating on the RSA Sukuk No. 1 Trust has also been affirmed at BBB-, in line with South Africa’s long-term foreign currency IDR.

Fitch said: “The BBB- rating reflects low trend GDP growth, significant fiscal and external deficits, and high debt levels, which are balanced by strong policy institutions, deep local capital markets and a favourable government debt structure.”

Meanwhile, S&P Global Ratings has affirmed its long- and short-term BBB-/A-3 foreign currency and BBB+/A-2 local currency sovereign credit ratings on South Africa, although the outlook remains negative.

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At the same time as announcing the other ratings, S&P also affirmed the zaAAA/zaA-1 South Africa national scale ratings.

S&P said: “South Africa’s weak economic growth, relative to that of peers in similar wealth categories, continues to be hurt by a combination of factors, in our view. On the external side, adverse terms of trade and weak external demand have created headwinds.

“On the domestic side, drought and subdued mining and manufacturing output, coupled with structural constraints, remain key negative factors. Largely due to some of these cyclical factors, we have revised down our real GDP growth assumptions for South Africa to 0.6% in 2016, from our 1.6% forecast published in December 2015. As weather patterns and terms of trade revert to mean levels, economic growth should improve.”

S&P has warned that, to place South Africa’s economy on a firmer footing and to maintain its investment-grade rating: “We see several structural measures as key. The first is the provision of a reliable source of energy, where we have observed progress. Combined measures have helped eliminate load shedding, which was prevalent in the last winter cycle and depressed overall 2015 economic growth.

“The second is labour reform. Prolonged strikes, mainly in mining and some manufacturing sectors, combined with less flexible labour laws and high youth unemployment, continue to pose structural weaknesses to South Africa’s economy.

“The third measure is the mining code, for which negotiations on Black Economic Empowerment are already sensitive. On these latter two points, we see risks that negotiations between the government, private sector and unions could become protracted and, even if concluded, implementation could be nettlesome.”

The rating agency says rules regarding labour relations and extractive industries are contentious in any country, but even more so in South Africa, given the historical legacy of apartheid.

It also has some concerns around the political environment, warning political tensions have increased in South Africa since the removal of former finance minister, Nhlanhla Nene, last December; the Constitutional Court ruling against President Jacob Zuma on 31 March 2016; and periodic disputes between key government institutions and within the ruling African National Congress.

Fitch agreed, adding: “Political risk has increased since the previous rating review in December 2015, although it is not out of line with BBB peers. The dismissal of two finance ministers in a week in December and subsequent tensions between the new finance minister Pravin Gordhan and other parts of the government have raised questions about the commitment of the government to sustained fiscal consolidation and prudent governance of state-owned enterprises.”

S&P predicted: “Keeping in mind these structural issues and our expectation that future interest rate hikes by the US Federal Reserve will not roil emerging markets, and that China will remain moderately supportive of world growth, we forecast South Africa’s economy will grow 1.5% in real terms in 2017 and rise above 2% only by 2019.

“We also estimate that real GDP per capita will stand at $5,000 this year and rise commensurately with growth through our forecast horizon to 2019.”

Overall, it said: “South Africa remains a middle income country with a diversified economy and wide income disparities.”

Meanwhile, Allianz Global Corporate & Specialty Africa chief executive officer, and president of the Insurance Institute of South Africa (IISA), Delphine Maïdou, suggested insurers have a critical role to play in protecting the current and future public-private projects aimed at reviving the South African economy.

While addressing insurance professionals at an IISA event on what the industry needs to do to strengthen its role in stimulating the country’s economy, she said the government’s increasing focus on investment in infrastructure, energy, transport and logistics, water and sanitation, land and agriculture, and telecommunication to name a few needs the insurance sector to know and understand the risks associated with each project to ensure the effective management, control and reduction of risks – wherever and whenever these occur.

She said: “We believe that a collaborative approach – harnessing the combined inputs of all parties – offers the best response to risk challenges, and that the majority of losses can be avoided through diligent risk management and sound insurance solutions. Insurance companies operating in South Africa are well capitalised to support the economic and infrastructure development the country sorely needs but they must to be brought on board early by both government and business, and be relied upon to provide trusted risk management guidance and insurance coverage.”

The South African economy is going through trying times at present and the country cannot afford below-par risk management and insurance on major projects. Transparency and openness in this area is part and parcel of restoring investor confidence in our economy, she added.

A below investment grade sovereign rating must be avoided as it will affect the insurance industry significantly. The sovereign rating of South Africa affects the rating of insurance companies and this means local insurers may not be able to place complex local or external insurance risks, such as engineering projects, if they have a sub-investment grade rating.

“As it is, insurers in South Africa are already feeling the effect of a downgraded sovereign rating as global businesses and financiers often insist on an A+ rating. At times, they do not even consider parental guarantees for international companies operating in South Africa, which results in local entities losing to companies operating outside of the country,” Ms Maïdou said.