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Dodging the downgrade:

SA not yet out of the woods

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Renier de Bruyn

Investment Analyst

South Africa has dodged the downgrade bullet – for now. The three major rating agencies – Standard & Poor’s (S&P), Fitch and Moody’s – have all kept our sovereign rating unchanged above non-investment grade. However, with all three rating agencies placing South Africa on a negative outlook, we are not yet out of the woods and much work needs to be done to avert a downgrade at the next round of reviews.

(To hear a message by Sanlam Private Wealth CEO Daniël Kriel on the decisions by the three leading rating agencies, see video link below.)

Amid strong fears that S&P would slash us to junk status when it published its report on South African debt on Friday, the rating agency kept the rating of our government’s foreign currency denominated debt on the lowest investment grade notch at BBB-. However, as expected, S&P downgraded the local currency rating by one notch to BBB, but this new rating is still two notches above non-investment grade.

A week earlier, Fitch announced that it had dropped the outlook attached to its BBB- rating of South African debt to negative from stable. Moody’s issued a report on the same date without any changes to the sovereign credit rating at Baa2, two notches above sub-investment grade, with a negative outlook.

We believe we should take heart from this encouraging outcome towards the end of what has proved to be a tumultuous year on many fronts. Most economists polled in the first half of 2016 agreed that a fall to junk status seemed inevitable. Given all the political turmoil both locally and abroad, South Africa’s temporary avoidance of a ratings downgrade, coupled with peaceful municipal elections earlier this year and demonstrated resilience of key institutions, has made it clear that all is not lost for South Africa just yet.

Should we be blessed with sufficient rain to end the crippling drought crisis facing our country, and should commodity prices behave, the prospects for our economy may be materially better in 2017 compared to what has been a tough 2016.

South Africans must realise, however, that the most recent spate of decisions by the rating agencies are merely a temporary stay of execution. All three agencies have now assigned a negative outlook to our country. Their latest reports are in agreement about one crucial factor: South Africa needs to implement structural reforms to improve the long-term growth potential of our economy.

A positive development arising from the continued threat of a downgrade over the past year has been increased cooperation between government, labour and business, which had been sorely lacking in the past. While it remains to be seen whether policymakers will eventually push through the necessary reforms given the various vested interests and social demands, it is to be hoped that these cooperative efforts will make South Africa a more business-friendly environment.

It is also imperative that we improve the financial state and governance of our state-owned enterprises to avoid the need for future bailouts with taxpayers’ money.

A NOTE ON CLIENT PORTFOLIOS

Despite threats of a ratings downgrade over the past year, we increased exposure to banks and more recently to retail shares in many of our clients’ portfolios. These shares should now benefit from the positive outcome of the ratings decisions as well as an expected recovery in consumer confidence in 2017 on the back of lower food inflation, increased rand strength and an overall improved economic growth outlook.

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