Country risk: Analysts take a dim view of South Africa’s investor potential

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By:
Jeremy Weltman
Published on:

The sovereign borrower, it seems, will lose its last remaining investment grade, as the risks accentuate.

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South Africa’s stock has diminished in recent years. That much is clear from Euromoney’s crowd-sourcing risk survey.

Plummeting to 72nd out of 174 countries in the global risk rankings, below Barbados, Morocco, Russia and other more favourable options, South Africa is down 14 places over a five-year timespan, which puts it less than half a risk point higher than Turkey, another large emerging market falling out of favour with the experts.

The risk score seemed to stabilize in Q4, mainly resulting from increased political stability and a more concerted attempt to root out corruption and deal with the state capture episode under former president Jacob Zuma.

However, this was before the national accounts for the quarter were released confirming another technical recession – the second in two years – leaving the economy growing by just 0.2% on a year-average basis in 2019, its worst performance in a decade.

This has done little to reverse the trend decline in sentiment toward South Africa as an asset class, and in 2020 analysts are becoming more cautious.

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Dawie Roodt,
Efficient Group

One of those is chief economist of Efficient Group, Dawie Roodt, who along with other local survey contributors is notably downbeat.

He expects to downgrade his assessment in the first quarter survey – now under way, to be released early April – citing a range of factors making the country a riskier bet, and all pointing to a Moody’s downgrade this month.

Standard & Poor’s stripped South Africa of investment grade in April 2017 and is currently awarding a BB rating with a negative outlook. Fitch took similar action just days later when downgrading to BB+ (also with a negative outlook), leaving Moody’s with the only investment grade it altered from stable to negative in November.

A big problem, says Roodt, is there is no news on how Eskom, the debt-strapped state-owned electricity company, will be funded. It provides approximately 95% of the country’s power supplies, and it means the country must endure rolling blackouts.

Poor electricity generation from ageing coal-fired plants is hampering the manufacturing and mining sectors.

However, this is just one of the risks weighing on South Africa’s profile, while ensuring that policymaking is one of the lowest-scoring political factors in the survey.

Indeed, the full range of economic factors is under pressure again as economists reassess the macro-fiscal climate.

Reining in the optimism

The government’s GDP estimates “are too generous”, says Roodt, even before the effects of the coronavirus are factored in.

“Q1 GDP growth will be probably around zero, or just below, with GDP growth for the year at or below zero, resulting in a sixth year of negative per capita GDP growth,” he says.

Roodt believes the current financial year’s public revenue under-collection will be understated by the finance ministry, and so the current year’s deficit-to-GDP ratio will be more than what is projected, with the debt-to-GDP ratio also higher.

The deficit is expected to rise from 6.1% of GDP in 2019 to 6.7% in 2020, according to the IMF. The structural deficit will widen from 4.6% to 4.9% and gross government debt will increase from 60.8% to 65.3%, though these projections were made a few months back and will be wide of the mark if the IMF’s growth projection of 0.8% is missed.

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Hugo Pienaar,
Bureau for
Economic Research

Hugo Pienaar, chief economist at South Africa’s Bureau for Economic Research – a local institute also taking part in Euromoney’s survey – says the 2020 budget took some important steps to cap the rise in government debt, though the debt profile outlined in the budget is slightly worse than the dire outlook presented in October’s medium-term budget policy statement (MTBPS) from the National Treasury.

“Once again, the worsening debt profile is driven by weaker-than-expected historic real and nominal GDP outcomes, as well as a more subdued growth outlook than previously assumed,” he says.

“This filters through to weaker government revenue projections. As a result, gross debt to GDP is now expected to rise to 71.6% of GDP in 2022/23.”

Pienaar adds: “Crucially, the fiscal target suggested in the MTBPS of achieving a main budget primary balance [ie revenue equal to non-interest expenditure, excluding financial support to Eskom] by 2022/23 proved to be unattainable.”

There is also substantial execution risk to the Treasury’s fiscal consolidation strategy. One of the problems is that public sector trade unions have not agreed to the proposed wage reductions.

The political risks are becoming clear, too, with the country enduring an unemployment rate of almost 30% and now having to face the onset of coronavirus spreading across the globe.

President Cyril Ramaphosa has already faced some difficult challenges. Ensuring South Africa attracts the investment it needs is about to become one of the hardest of all.