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Brazil’s slow progress offers SA lessons

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by HILARY JOFFE

The Temer administration dragged its feet on corrective fiscal measures and Ramaphosa needs to learn from the mistake and act quickly to avert

In January, two years after Brazil recalled then president Dilma Rousseff and replaced her with Michel Temer, who promised to bust corruption and get the country’s public finances back on track, Brazil got downgraded — again — by ratings agency S&P Global Ratings.

“Despite various policy advances by the Temer administration, Brazil has made slower than expected progress in putting in place meaningful legislation to correct structural fiscal slippage and rising debt levels. Delays in advancing corrective fiscal measures, along with uncertain prospects following the 2018 presidential elections, reflect weaker effectiveness in policy making,” S&P said.

Substitute SA and Cyril Ramaphosa and 2019 and the echoes with SA could be eerily similar if the new administration does not act fast to make the policy changes needed to boost economic growth and correct its fiscal slippage and rising debt.

The head of S&P’s SA office, Konrad Reuss, drew the analogy with Brazil and sounded just this warning when he spoke at the Gordon Institute of Business Science on Tuesday. “It’s now all about that SA can prove we can do better than Brazil in the next three to five years,” he said.

But the message from Reuss, and from S&P’s competitors, has been one of caution.

S&P’s official comment the day Ramaphosa was sworn in was: “Economic growth remains low, impeding the path to fiscal consolidation. We think the government will attempt to introduce offsetting measures in an effort to improve budgetary outcomes, but these may not be sufficient to stabilise public finances in the near term.”

Fitch said on Monday that Jacob Zuma’s resignation had reduced the risk of policy paralysis and Ramaphosa would “bring a greater focus to improving governance and strengthening economic and fiscal policy, which is likely to contribute to a recovery in business confidence and growth”. However, said Fitch sovereign analyst Jan Friederich: “Whether this will be sufficient to lead to a significant improvement in the government debt trajectory and trend growth is uncertain.”

The quietest of the three has been Moody’s, whose sovereign analyst Zuzana Brixiova said: “Moody’s is closely watching developments in SA and is focused on the policy implications of changes in leadership.

“The key point from a credit perspective will be the new leadership’s response to SA’s economic and fiscal challenges and progress in implementing reforms addressing them.”

It is, however, Moody’s that matters the most at this point. S&P and Fitch already have SA’s ratings — both local and foreign currency — on junk status. Both now have “stable” outlooks on the ratings so they won’t take SA down any further unless things get worse.

By contrast, Moody’s still has SA on investment grade but the clock is ticking after it put SA on watch for a downgrade on November 24, promising to pronounce after the budget. As long as SA is still investment grade on the Moody’s scale, it can stay in the key Citi World Government Bond Index and though it is not clear how much capital would flow out if SA were junked by Moody’s and fell out of the index, Citi economist Gina Schoeman points out that SA’s inclusion in the index five years ago has meant strong capital inflows, in good times and bad, into SA’s bond market.

Over that period, foreign ownership of SA’s local currency bonds (denominated in rand) has climbed steeply (see graph), to an unprecedented 45%. And, said Schoeman, this meant SA had to appease those foreign investors and had no option but to do austerity.

For S&P, one of the most important metrics it watches is per capita real GDP growth in dollar terms, and over the past 10 years SA has been at the bottom of the threshold the rating agency has for the BB category. “In the sequence of downgrades, the one factor that has always caused great disappointment is that year after year we have had to prune back our growth expectations,” Reuss said.

The structural growth and policy issues behind the budget have meant that, year after year, the turning point in the government debt ratio has been pushed out, resulting in diminished policy credibility. Only in October did the finance minister finally own up to what the situation is. That the trend in the debt burden has become unsustainable, said Reuss. There will be further pressure on the ratings “if we see more of the same”, he said, but the rating would have upside potential if there were the policies to drive a much higher growth story and the fiscal problems were addressed “in a meaningful way”.

Unusually for an emerging market, SA managed to retain its investment grade status for 17 years before S&P junked it.

But the ratings agencies data show at least that it can be done, even if the walk back to investment grade is a long one. Over the past year there have been 24 “fallen angels” that have been downgraded to subinvestment grade by S&P, 16 of them in emerging markets and Africa (including SA). But there have also been 26 “rising stars” that have been returned to investment grade status.