Consumers are urged to guard their expenditure and to live within their means following the decisions announced by rating agencies Moody’s Investor Service and Standard & Poor’s (S&P).
Analyst at the University of KwaZulu-Natal and expert Lukhona Mnguni urged citizens to live within their means and to avoid new credit as it might come with higher interest rates.
S&P lowered South Africa’s long term foreign and local currency debt ratings by one notch each to ‘BB’ and ‘BB+’. In its assessment on Friday, the agency cited weak real nominal Gross Domestic Product (GDP) growth that has led to further deterioration of South Africa’s public finances beyond the rating agency’s previous expectations.
The credit rating agency, however, changed the outlook to stable from negative, citing that the stable outlook reflects their view that “South Africa’s credit metrics will remain broadly unchanged next year” and “political distraction could abate following the party congress of the governing African National Congress (ANC) in December 2017, helping the government to focus on designing and implementing measures to improve economic growth and stabilise public finances”.
Meanwhile, Moody’s gave South Africa some reprieve by maintaining the country’s credit rating above junk at Baa3. The ratings agency placed the country’s long-term foreign and local currency debt ratings of ‘Baa3’ on a 90-day review for a downgrade. The ratings carry a negative outlook.
According to Moody’s, the decision to place South Africa’s rating on review for a downgrade was prompted by a series of recent developments which suggest that South Africa’s economic and fiscal challenges are more pronounced than Moody’s had previously assumed.
Finding opportunity in hardship
In an interview with SAnews on Wednesday, Mnguni called on South Africans to be innovative.
“Let us all in our own ways try to find new methods of economic participation beyond just people getting jobs and being employed. [Let us look at] other things citizens can do to innovate new platforms to employ people and create economic activity.
“In the midst of any crisis, there is always an opportunity. My encouragement to South Africans would be to try to exploit those opportunities that come from that kind of crisis,” he said.
Mnguni said it is important that South Africa sends the right key messages to the agencies.
“The one message is political certainty and the second is really a message around issues of stability, that we know what we are doing and that we are pursuing a common vision. There has to be that policy certainty and leadership stability,” he said.
Impact on citizens
While the decisions of the agencies won’t be felt immediately by ordinary South Africans, the currency continues to be volatile and it will have an effect on locals in terms of the affordability of things like fuel (which is tied up in the performance of the currency) and paraffin prices.
Mnguni said should Moody’s decide to place the country on junk status in February, this could force people holding bonds in the local currency to pull out, thereby influencing the Reserve Bank to put up interest rates.
“Once you do that, it affects how much I pay for my car and my house. The cost of living will go up. These are the looming possibilities for the ordinary man on the street.”
Leading up to the Moody’s 90-day review, Mnguni said the credit rating agency will be waiting to see the outcome of the ruling party’s conference next month.
“They are waiting to see the tone of the State of the Nation Address (SONA) in February and the Budget Speech also,” he said.
The revenue collection shortfall, GDP growth prospects and short term solutions to jump start economic growth are things the agencies will also scrutinise, Mnguni said.
Higher Education funding and National Health Insurance
Another policy imperative that credit rating agencies will be looking at is how South Africa funds free higher education and the National Health Insurance (NHI).
“Free higher education is an issue we can’t run away from unless we want to continue to see instability at universities in the form of Fees Must Fall Movement… [and] we need to kick-start the [NHI]. Those are two policy imperatives that we will all be looking at with baited breath.”
In its reaction to the rating decisions, government said measures are being considered to improve access to higher education for all deserving students.
President Jacob Zuma – who released the findings of a Report of the Commission into the Feasibility of Fee-Free Higher Education and Training in South Africa earlier this month – has directed that the report recommendations be implemented in a fiscally sustainable manner.
Government said the 2018 Budget will outline decisive and specific policy measures to strengthen the fiscal framework as an important contributor to improved confidence of all stakeholders and a return to inclusive growth.
However, Mnguni is of the view that GDP figures in the third quarter of 2017, which are due to be released by Statistics South Africa next week, will be positive.
“The drought in the Western Cape might reflect badly for agriculture because those are some of the areas that we know the economy gets active in the third and fourth quarter in terms of agricultural outputs.
“So it will be a difficult one to call, but I think we will see marginal growth of some 1.5% still in the third quarter. I don’t expect the trajectory to turn back again to negative growth, but year-on-year, we could be at negative growth,” Mnguni said. – SAnews.gov.za
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