It will be a long, hard road back to investment grade for South Africa, the Chamber of Mines of South Africa said on Saturday.
The decision by rating agency S&P Global to downgrade South Africa’s long-term local currency rating was regrettable, Chamber of Mines chief economist Henk Langenhoven said.
“However, we cannot be overly surprised given the absence of any fiscal plan in the medium-term budget policy statement and some reckless statements from certain parts of government on free education, funding of the national health insurance scheme, and the appetite for nuclear power, which are all adding to the fiscal risk of runaway debt and debt servicing costs. This all builds on the irresponsible cabinet reshuffles since March 2017, and the political uncertainty ahead of the [African National Congress’s] elective conference next month.”
The pervasive negative impact on the mining sector was of great concern and could not have come at a worse time. The sector had the potential to continue to recover on the back of improved commodity prices, and rand weakness may help in this regard.
“However, a weaker rand, coupled with rising oil prices, will lead to higher inflation and higher short-term interest rates, as the governor of the [South African] Reserve Bank warned this week. Mining costs have already risen by over 10 percent this year, and any acceleration will further jeopardise the sector’s recovery. Higher long-term interest rates will add further costs to the financing needs of the sector. There is a direct correlation between mining sector debt and the cost of financing it,” Langenhoven said.
“The mining sector’s growth outlook is directly linked to commodity prices improving. Its sustainability, however, is inextricably linked to the dynamics of the domestic economy. The credit downgrade due to the mismanagement of the economy and uncertainty regarding government polices has dramatically turned sentiment for the worse. The mismanagement of state-owned enterprises (SoEs) has become an albatross for government, and for the country as a whole, due to the size of their debt and debt servicing costs,” he said.
“There is no painless adjustment from the current predicament, owing to the structural nature of its causes, and the clear lack of confidence in the domestic economy. The ratings agencies and prospective investors will be watching the outcomes of the December conference closely. Without solid indications of policy reforms emanating from the conference and/or the years between the conference and the general election in 2019, no respite can be expected from ratings agencies.
“No amount of ‘talking’ without credible rescue plans will turn the situation around. It will be a long, hard road back to investment grade,” Langenhoven said.
On Friday, S&P lowered South Africa’s long-term foreign and local currency debt ratings by one notch each to “BB” and “BB+” respectively, citing weak real nominal GDP growth that had led to further deterioration of South Africa’s public finances beyond the rating agency’s previous expectations.
Nonetheless, S&P changed the outlook to stable from negative, saying the stable outlook reflected their view that South Africa’s credit metrics would remain broadly unchanged next year, and political distraction could abate following the African National Congress’s elective conference in December, helping government focus on designing and implementing measures to improve economic growth and stabilise public finances.
Also on Friday, Moody’s Investors Service placed South Africa’s long-term foreign and local currency debt ratings of “Baa3” on a 90-day review for a downgrade. The ratings carried a negative outlook. According to Moody’s, the decision to place South Africa’s rating on review for a downgrade was prompted by a series of recent developments which suggested that South Africa’s economic and fiscal problems were more pronounced than Moody’s had previously assumed.
– African News Agency (ANA), editing by Jacques Keet