The political events of the past week are resoundingly positive for SA’s economic and credit-ratings outlook, but whether SA continues to stay one step ahead of a junk rating really depends on a resurgence in economic growth.
The withdrawal of charges against finance minister Pravin Gordhan, a good medium-term budget and the release of the public protector’s report on state capture highlight SA’s commitment to fiscal consolidation, the strength of the country’s democratic institutions and the lively voice of civil society, says Old Mutual Investment Group chief economist, Rian le Roux.
He feels SA might just avoid a downgrade to junk at S&P’s review on December 2.
Deutsche Bank economist Danelee Masia is more optimistic. She thinks the markets have underestimated the extent of the positive shift that has occurred, saying: "The next 12 months are likely to bring economic recovery and an improving political backdrop."
However, a "dark cloud" still hangs over SA given the economy’s poor performance and lack of meaningful confidence-boosting policy measures, warns Le Roux.
Fitch Ratings made the same point recently, noting that reform efforts amounted to little more than "fine-tuning" and would be insufficient to raise business confidence.
"The efforts of Gordhan and his team are not necessarily enough on their own to buy the country’s investment-grade rating more time," echoes BNP Paribas Securities economist Jeffrey Schultz.
"Growth remains weak, and tangible evidence of meaningful economic reform continues to be lacking."
But let’s not be unduly pessimistic, says Le Roux. The economy is cyclically adjusting, with inflation and interest rates peaking, and the current account deficit narrowing. Also, debilitating labour disruptions have not materialised; and the economy has managed to avoid a full-blown recession.
So it’s going to be a close call. The wild card remains the politics. Were new charges to be levied against Gordhan or were he to be removed in a cabinet reshuffle, junk status would become "inevitable", says Schultz.
But even if SA is downgraded to junk, it wouldn’t necessarily be devastating to the economy given that this is already fully priced into the bond market.
In any event, SA’s credit rating is not the only factor that will influence its borrowing costs, says Dave Mohr, Old Mutual Multi-Managers’ chief investment strategist.
Take the case of Brazil. S&P cut its rating to two notches below investment grade in February, but that government’s long-term borrowing cost has actually declined, from 17% to 11%.
"Ultimately, Brazil has benefited from the same trends as SA since the start of the year: firmer commodity prices, improved global sentiment towards emerging markets, currency appreciation, a better inflation outlook and prospects for interest rate cuts," says Mohr.
However, Schultz notes that there has also been meaningful political change in Brazil since the impeachment of President Dilma Rousseff. "It’s not yet clear to me that ... the SA government would necessarily immediately follow the same path, given our view that President Jacob Zuma still controls the majority voting faction within the ANC," he says.
Standard Bank researched the economic fall-out that occurred in Brazil, Bulgaria, Croatia, Hungary, Romania and Russia after they lost their investment-grade ratings. If SA follows the average experience, it is set for a recession lasting almost two years. However, much will depend on government’s reaction to a downgrade.
"Should the SA government not stick to its fiscal targets ... this may not only kick-start a spiral of further currency weakness, but also weaker government bond yields, higher policy rates and weaker growth," the researchers warn.
On the other hand, they have found that if SA is downgraded but maintains fiscal discipline it may already have experienced the worst of both currency and bond weakness.
As long as Gordhan remains finance minister, there is every reason to believe that SA will avoid multiple downgrades.
But to cement an investment-grade rating will require improved economic performance that reduces social and fiscal pressures.