Ramaphosa Presidency Brings Ratings Reprieve for South Africa

29 March 2018 Leighton G. Luke, Research Manager, Indian Ocean Research Programme

Background

Credit rating agency Moody’s Investors Service has kept South Africa’s credit rating at the level of Baa3, the lowest investment-grade ranking. In a decision of equal importance, the outlook was raised from negative to stable.

The ratings decision, handed down on 23 March, concludes a review that began in November 2017. The decision provides a cautious endorsement by Moody’s of the leadership of President Cyril Ramaphosa. It reflects the agency’s belief that, under Ramaphosa, the South African Government is moving away from the opacity and unpredictability of the Jacob Zuma years, to a more transparent, fiscally sound, policy agenda.

Comment

In announcing its verdict, Moody’s decided not to join Fitch and S&P Global in assigning South Africa a below-investment grade “junk bond” rating. S&P is due to announce the review of its South African rating on 25 May and it will be interesting to see whether it shares Moody’s confidence in the Ramaphosa Administration.

Among the changes made by the new president was the reappointment of former Finance Ministers Nhlanhla Nene (returned as Finance Minister) and Pravin Gordhan, now in the role of Minister of Public Enterprises. Competent, evidently incorruptible ministers, both Nene and Gordhan were sacked by Zuma for not allowing him to have unfettered access to the National Treasury.

Other important changes that underscore the sense of a new approach are the removal of underperforming Zuma loyalists from the leaderships of the South African Revenue Service and the electricity utility, Eskom. At many of South Africa’s seven hundred parastatal companies, such as Eskom and South African Airways, some hard decisions will be required in the wake of the Zuma era. Having competent businesspeople in charge again should go a long way towards improving the efficiency of their operations and reducing the need for the bailouts that have bled large sums from the national budget.

Several economic changes that are aiding the process are: the return of economic growth – although a paltry 1.3 per cent in 2017, it was nonetheless a significant improvement – as well as a one per cent fall in the unemployment rate to 26.7 per cent and the increase on 1 April of the rate of the indirect Value-Added Tax from 14 per cent to 15 per cent.

There are some caveats, however. The nascent economic recovery is likely to be tempered by the adoption of overtly left-leaning policies, as the African National Congress government seeks to counter the populism of the Economic Freedom Fighters party. Policies such as land expropriation without compensation and fee-free tertiary education are already on the cards and more could follow.

Overall though, the indications are that, under Ramaphosa, the standard of governance in South Africa will keep improving. If so, the country should be able to not only stave off further downgrades, but may even see all three ratings agencies restore its credit rating to investment level, possibly even before the 2019 general election. If so, that will provide a definite boost to the electoral prospects of the ANC.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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