South Africa facing tough questions as minister goes

The removal of the minister increases uncertainty about fiscal policy and contingent liabilities from state-owned companies, although it is unclear at this stage whether this will result in significant policy changes, Fitch Ratings said. The agency warned: “The surprise announcement, coupled with the lack of clarity on why Mr Nene was replaced or the preferred policies of his relatively inexperienced successor, inevitably raises questions about the motivation for the change in personnel and the implications for economic policy. “The change would be relevant to our sovereign rating assessment if it led to a loosening of fiscal policy, such as an upward revision to the government’s nominal expenditure ceilings, and a faster increase in government indebtedness. “We identified looser fiscal policy that resulted in a failure to stabilise the ratio of government debt/GDP as a rating sensitivity when we downgraded South Africa to BBB-/stable last week.”hideThe South African Chamber of Commerce and Industry (Sacci)‚ which represents about 20‚000 businesses‚ has urged President Jacob Zuma to explain why he removed Mr Nene from his position. “As an important and key stakeholder‚ we are looking forward to the president sharing the motivation for this decision with the business community as a matter of priority‚” Sacci CEO Alan Mukoki said. Meanwhile, the Association for Savings and Investment South Africa also warned: “The unexpected removal of Mr Nene from the position of finance minister is of grave concern to the business sector of South Africa, especially as it comes only days after the downgrade of SA’s credit rating to just one level above speculative grade or junk. “As businesses in South Africa [SA], we are particularly concerned that the shock announcement comes at a time when our country and our economy are in desperate need of continuity and consistency of policy.” Lesiba Mothata, Chief Economist at Investment Solutions, added: “Economic sanity had prevailed in SA until Mr Nene was removed from his post. Now, the country is on a slippery slope as the assault on the rand continues and investor confidence fades. “Investors have already voted with their feet on SA assets as credit rating downgrades by Fitch and outlook revisions by Standard & Poor’s (S&P) precipitated the stampede. In the past three months, foreign investors have sold SA equities and bonds to the tune of R33bn and R7bn respectively, according to data from the Johannesburg Stock Exchange. While these figures are not as large as in previous episodes, they have set an uneasy tone for SA as it enters 2016.” Mr Mothata added: “The Institute of International Finance has warned foreign capital flows into emerging market economies could fall substantially from the heady inflows experienced in the past two years. “Investors need to be on the lookout for a potential risk event for SA. While it would take a severely adverse economic situation to push SA into non-investment grade—and the country does have some resilience given its low level of external debt—the danger of downgrades to the bottom end of investment grade credit quality remains.” Shortly before the minister was removed, Fitch Ratings had downgraded South Africa’s long-term foreign and local currency Issuer Default Rating (IDR) to BBB- from BBB and to BBB from BBB+, respectively. The outlooks are stable. The issue ratings on South Africa’s senior unsecured foreign and local currency bonds have also been downgraded to BBB- from BBB and BBB from BBB+, respectively. The country ceiling for South Africa and the common country ceiling of the Common Monetary Area of South Africa, Lesotho (BB-), Namibia (BBB-) and Swaziland has been lowered by two notches to BBB from A-. The short-term foreign currency IDR has been affirmed at F3. S&P has also revised the outlook on South Africa to negative from stable. It affirmed the long- and short-term foreign currency sovereign credit ratings on South Africa at BBB-/A-3. It also affirmed the BBB+/A-2 long- and short-term local currency ratings and, at the same time, it affirmed the zaAAA/zaA-1 South Africa national scale ratings. S&P warned: “We expect GDP growth in 2016 to remain around 1.6% and only increase above 2% from 2017 as the capacity of electricity supply improves thanks to new power plants. Business confidence may improve if the government takes the necessary steps to improve policy coordination and implement delayed legislation. “Economic growth for the next few years will also depend on the absence of prolonged labour strikes, and limited negative spillover effects from the likely US interest rate hikes, or the impact of lower demand from China on commodity prices and export volumes.” Following the move on the country ratings, S&P revised its outlooks to negative from stable on eight South African banks. It said slower economic growth and the creeping risk of higher inflation (through electricity, drought and the weaker South African rand) and interest rates is pushing up the risk of high household debt. There is also greater risk that real incomes will not stay in step with debt serviceability of households. It added: “We believe rapid inflation is more of a risk for the unsecured or instalment finance books, as they are often at fixed rates and the population tends to be more inflation-sensitive.” More positively, Fitch Ratings has affirmed Sanlam Life Insurance’s (Sanlam Life) national Insurer Financial Strength (IFS) rating at AA+(zaf), national long-term rating at AA(zaf) and national short-term rating at F1+(zaf). Fitch has also affirmed Sanlam Life’s subordinated debt at A+(zaf). Fitch has affirmed Sanlam Life’s parent and the ultimate holding company of the Sanlam group, Sanlam Limited’s (Sanlam) national long-term rating at AA-(zaf). Concurrently, Fitch has affirmed Sanlam Developing Markets Limited’s (SDM) national IFS rating at AA+(zaf) and national long-term rating at AA(zaf). The outlooks are stable. Fitch Ratings has also affirmed South Africa-based Santam’s national IFS rating at AA+(zaf) and national long-term rating at AA(zaf). The outlooks are stable. Fitch has simultaneously affirmed Santam’s subordinated debt at A+(zaf). It said the affirmation reflected Santam’s ‘core’ status within the Sanlam group. Santam is the largest general insurer in South Africa, with a strong domestic franchise and a market share of 22%. It writes all classes of business and has a well-known brand in both commercial and personal lines. Santam’s geographic revenue diversification remains limited despite an increasing portion of premiums generated outside South Africa.

South Africa facing tough questions as minister goes

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