South Africa Needs Better Reforms for Faster Growth

South Africa still needs “significant transformation”, but it would take place more effectively in a faster-growing economy, wherein the treasury had more flexibility in its spending choices and “investor sentiment (was) on our side”, says Konrad Reuss, S&P Global Ratings MD for sub-Saharan Africa.

Policymakers had to be aware of South Africa’s vulnerability, Reuss said on Thursday, referring to the fact foreign investors held more than 35% of the government’s rand-denominated debt. “If they decide they do not want to (invest) in South Africa, we would have (large) outflows,” businesslive reported.

South Africa’s bond market has enjoyed considerable inflows in 2017, amid a global search for yield that has favored emerging markets. But if S&P and Moody’s downgrade the country’s local-currency rating to junk, South Africa would fall out of major global bond indices and could see as much as R130 billion-R190 billion ($1.005-1.46 billion) flowing out of its bond markets.

S&P, which junked South Africa’s foreign-currency denominated debt in April, was looking for structural reforms that would enhance business confidence, as well as better governance at parastatals, said Reuss. Investors and ratings agencies have consistently voiced concerns over the risks state-owned companies pose to government finances. At 52%, the government’s debt-to-GDP ratio was the highest yet, Leonard Kruger, a portfolio manager at Allan Gray, said at a recent roadshow.

Adding SOCs’ debt would increase this by 13%-14%. The government is the implicit, and in some cases explicit, guarantor of SOC debt. If an SOC were to default on debt repayments, the government would therefore have to step in.

“Turning around business confidence is the most important thing that needs to happen in this country,” said Lesiba Mothata, chief economist at Investment Solutions.

Mothata and Reuss were part of a panel discussion at an investment event hosted by Coreshares. “We are in the eye of the storm and it feels eerily quiet,” Reuss said. The rand and bond yields had barely moved despite the credit downgrades. “This suggests that a lot of pain is still to come.”

Still, South Africa had many positives, such as a sophisticated banking system that, if well managed, could drive a fairly quick turnaround, he said.

Countries that had lost their investment-grade status took on average eight years to regain it, S&P’s data indicates.

Unemployment had to be urgently addressed through apprenticeships, technical training and support for entrepreneurs, Reuss said.