Fitch upgrade affirms SA’s economic recovery

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JIMMY MOYAHA: Late on Friday afternoon we received an update from the team at Fitch – that is the ratings agency, of course – who announced that South Africa was upgraded a single notch in terms of the investment grade status of the country.

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To be clear, we are still considered to be in what is known as ‘junk’ status, but we are one notch higher than where we previously have been.

This is the first time that South Africa has received a ratings upgrade in more than 20 years and we’re going to be taking a look at it in a bit more detail with the director and chief economist at econometrics, Doctor Azar Jammine.

He joins me on the line now to see if we can make sense of this. Dr Jammine, lovely having you on the show as always. Thanks so much for taking the time.

We have received a couple of positive sentiments and a couple of positive conversations around the outlook towards South Africa. Were you surprised by the ratings upgrade?

DR AZAR JAMMINE: No. Fitch was actually the last of the last of the three big rating agencies to actually make a move or a statement.

In November last year, S&P Global, in the wake of the Medium-Term Budget Policy Statement, pushed us our credit rating up – which was the first in 16 years by them – and put us on a positive outlook.

Then a couple of weeks ago, Moody’s didn’t upgrade us; they had always been grading us on two notches below investment grade, whereas S&P and Fitch had been on three notches below investment grade. But Moody’s did improve our outlook to positive from stable.

So essentially Fitch has followed in the path of the two larger, if I could call them, ratings agencies with this latest move.

But what is significant, possibly, is that they did not rerate our outlook to positive.

They have left it at stable. So in that sense they’re slightly more negative than S&P Global and Moody’s.

JIMMY MOYAHA: Dr Jammine, what does it mean to go from BB to BB minus in the grand scheme of things?

DR AZAR JAMMINE: In the grand scheme of things that is a table that investors look at in deciding what the risks are in buying South African government bonds, and to what degree.

And if you are upgraded, it means the risk of default on those bonds is regarded as slightly less than before.

Theoretically, and in practice, you do get some effect. What that results in is a reduction in the interest rate that potential bond investors will demand to buy your bonds.

So effectively it helps to reduce the government’s debt servicing costs.

 JIMMY MOYAHA: Speaking of those debt servicing costs, Dr Jammine, I want to look at some of the factors that were considered when this ratings upgrade was announced. Of course, the prudent fiscal management that we’ve needed to evidence to global ratings agencies and global markets has been lacking over the last couple of years.

We finally seem to be getting that right. We finally seem to be addressing conversations around stabilisation of debt, around potentially even no longer dealing with state-owned entity bailouts.

What were some of the factors that were specifically outlined here around the positive move?

DR AZAR JAMMINE: Probably the most important was the fact that South Africa’s government has been running what is known as a ‘primary budget surplus’ for the last three years in a row.

Now, the primary surplus is the difference between revenue and expenditure – excluding interest payments. In normal parlance, you will keep hearing about South Africa running a budget deficit, which [may be] around 4% of GDP. That means that expenditure exceeds revenue by around 4% of GDP.

But a significant component of that is interest on government debt, which accounts for around 21% of total government revenue.

If you exclude that from the expenditure side, you end up with a situation now – and it has been for the last four years – where the tax revenues exceed all other forms of government spending, other than interest payments; and that is known as a primary surplus and is regarded as a very healthy situation from a fiscal point of view in indicating that the government is on a path of consolidation and discipline.

And that was reflected in the Medium-Term Budget Policy Statement that was tabled by Finance Minister Godongwana in November last year, and it came as no surprise that S&P almost immediately then upgraded our credit rating for the first time in two decades.

That was quite a dramatic move at the time, and pictures simply an endorsement of that realisation that our government is coming to grips with getting our public debt-to-GDP ratio to peak.

You’ve got to bear in mind that our public debt to GDP was 22% in 2008, and has risen to 79% at present.

So interest payments have risen from 7% of government revenue to 21% of government revenue over that time.

Effectively, by not controlling our deficit, we now have 14% less money available to spend on critical things such as education, health care, housing, policing – and those are critical areas of government spending.

So to get that ratio to peak, the way the government is now appearing to succeed in doing, is a significant step forward.

JIMMY MOYAHA: Speaking of steps forward, Dr Jannime, I want to take a look at where we go from here, because while we are still in what is deemed junk status, it is possible that we could use this momentum to catapult us out of that.

What needs to be done if that is the end goal, if that is the objective from this point forward to get back to investment grade as a country?

DR AZAR JAMMINE: Aha. Here you come to the nub of the commentary made by Fitch.

They made it quite clear that we are not going to get back to investment grade unless we improve the economic growth rate of the country from current levels of growth of around one or 1.5% – that is grossly insufficient to generate the increases in tax revenue that are required to enable us to actually qualify for removal of junk status, and for us to move up effectively two notches for it to be upgraded.

We’re a long way from that one so long as we keep growing at no more than 1%, 1.5%.

Once we grow 3%, 4%, 5% per annum, then tax revenues will start increasing much more rapidly.

And theoretically if the government persists with a disciplined approach we will end up with the significant reduction in our public debt-to-GDP ratio and in our debt-servicing costs, and that would indeed justify upgrades in our credit rating that take us back to investment grade status.

But we’re a long way from that. And that’s the reason, I think, why Fitch did not follow the path of S&P and Moody’s and instead kept us on a ‘stable outlook’ which, when you’re on a positive outlook, there’s a good chance that within the next year you will be upgraded further.

But with a ‘stable outlook’, it’s basically saying we don’t see that happening soon.

Obviously the events internationally that are depressing growth – and we’re likely to hear more about it tomorrow with the GDP figures being released for the first quarter – under the circumstances, with oil prices so much higher and consumers having to bear the cost of higher fuel prices, the chances of us improving our growth rate to the levels that are needed to enjoy another upgrade in our credit rating in the short term are quite slim.

JIMMY MOYAHA: Well, we were promised a ‘fiscal anchor’ by National Treasury, which would be announced around the Mid-Term Budget Policy Statement set to take place later this year. Perhaps that would give us a nudge in the right direction.

We’ll keep an eye on that, of course. We’ll see if we can cover that. The last time we looked at that I did speak, of course, to Dr Jammine about it as well.

So, as it stands at the moment, we will take the ratings upgrade by Fitch, but clearly we are still a long way away.

Dr Azar Jammine, the director and chief economist at Econometrix, joined us to unpack the Fitch ratings upgrade that was announced on Friday and what it means for South Africa.