Junk status not likely to scare off investors

Johannesburg – Nothing suggested that a downgrade in South Africa’s credit ratings to junk status by ratings agency Standard and Poor’s (S&P) would result in a massive exodus of foreign investment from the country, Stanlib chief economist Kevin Lings said yesterday.

Lings said ratings agencies Fitch and Moody’s still had South Africa on an investment grade and the country would also not be automatically excluded from various investment indices, many of which were based on a domestic rather than an international credit rating.

Read: Tipping point looms for SA

“So I don’t think we are about to have a rapid outflow of foreign investment or a massive exclusion from foreign investment indices,” Lings said.

“But if S&P does take us to junk status, we would be concerned that other ratings agencies would follow.”

Lings stressed that the credit ratings of many countries were downgraded to junk status.

He said the main message from international experience was that the concern was more about whether a country responded with appropriate policies rather than the downgrade itself.

Lings said this was what Stanlib would focus on this week in the Budget and whether the Budget was followed up with other initiatives.

He said the experience of Brazil showed that what hurt them was that after being downgraded to junk status, the country did not change policies sufficiently to try to turn around its prospects.

“It’s the response that matters enormously, so this is the pressure the Finance Minister (Pravin Gordhan) is facing.

“Government debt has moved up from 26 percent of GDP (gross domestic product) in 2009 and is approaching 50 percent of GDP. If our debt continues to rise then we will be downgraded to junk status. Its critical the (finance) minister shows fiscal discipline and keeps the deficit and debt under control.”

Lings said the rapid acceleration in South Africa’s debt in the past few years had clearly worried the ratings agencies and contributed to the country’s downgrade, particularly since this debt was used mainly for consumption expenditure within the government rather than for infrastructure.

He said the problem facing the government was that it had a long list of demands that would weigh on its budget deliberations, including civil service salary increases, the social grant budget, the cost of national health insurance, the funding of university and tertiary education and nuclear power, SAA and Eskom.

Lings said the government would be unable to meet all these demands and at the same time maintain fiscal discipline, which meant the government would have to make “some hard choices”, noting it would be very difficult for the government to meet its ambitions without an increase in the tax base and it needed fixed investment by the corporate sector to grow employment.

But he said the corporate sector, despite being in reasonably good financial shape, was in “an investment recession” because of a lack of confidence.

“The key to unlock South Africa’s true potential is to make the corporate sector more confident.”

Lings said they would be a lot more optimistic that South Africa could avoid a ratings downgrade and lift the country’s growth rate if the growth in fixed investment spending by the private sector started increasing.