Changing of the Guard: South Africa
By Rajen Ranchhoojee | May.12.2017
On 3 April, 2017, S&P Global led the way in downgrading South Africa’s Sovereign Credit Rating to non-investment-grade ‘Junk’ status. This following President Zuma’s purging of his Cabinet on 31 March, 2017, in which a total of 20 ministers and deputy ministers were removed from their posts. Most notable was the unceremonious sacking of the Minister and Deputy Minister of Finance.
Just over one month on, we look to evaluate the immediate and anticipated consequences of a ‘Junk Status’ rating for government, business and individuals alike. This is not the first time that South Africa’s credit rating has slipped to ‘junk’ status, though it has spent the last 17 years enjoying investment grade ratings, the last year of which has been fought staving off what many considered an inevitable downgrade.
The reality of South Africa’s undesirable sovereign credit rating is not one that can be immediately felt, with many individuals believing that the ‘doomsday’ predictions were nothing more than negative hype. The impact of the downgrade however, as we will come to understand, is going to be slow and fundamental, and not one that is immediately apparent.
South Africa’s greatest achievement over the past five years has been the roll-out of numerous public private partnerships ‘PPPs’, particularly in the key sectors of energy and transport. These programmes account for the vast majority of foreign direct investment into the country. A cornerstone principal of the success of these programmes, is that they have been backed by sovereign guarantees. Whilst a ratings downgrade will not diminish out-right the comfort provided by these guarantees, it will have the effect that the government will likely not be able to wean investors off the comfort of these guarantees, as government had ultimately intended it would over a period of time. These sovereign guarantees have to be recorded as contingent liabilities by the national treasury, and as such, their continued existence inhibits the Government’s ability to spend. A downgrade will also increase cost for both government and PPP infrastructure projects. Strained availability and the increased cost of capital will result in more expensive infrastructure outlay by the government and greater risk returns being required by investors.
A further direct impact of the ratings downgrade is the necessary divestiture by local and international institutional investors that are not permitted to invest in jurisdictions that do not hold a credit-worthy rating.
In a country that has been positioned to turn its’ socio-economic fate through infrastructure investment and industrialisation, a sustained sub-investment-grade rating could have long term negative effects that may take decades to overcome.