The excessive reliance on the court system risks judicial overreach, where the judiciary is often approached to compensate for the gaps in the functioning of the other government branches, said Zuzana Brixovia, lead analyst at Moody’s.
The agency rates the country’s long-term foreign and local currency debt ratings at BAA3, with a negative outlook.
According to Moody’s, the country’s institutional framework has weakened progressively over the years. Recently, the deterioration has become more pronounced with infighting in the run-up to governing party’s elections later this year that culminated with the March cabinet reshuffle.
The cabinet reshuffle increased policy uncertainty and reduced investor confidence in an economy already facing downside pressures from limited competition in some sectors and high levels of unemployment.
In July, after delivering her findings into an apartheid-era bailout granted to Bankorp, which was acquired by Absa in 1992, public protector Busisiwe Mkhwebane prescribed the Reserve bank’s primary mandate be changed so that it promotes balanced and sustainable economic growth while ensuring the socio-economic well-being of citizens is protected.
Her prescribed remedial action was met by a sharp sell-off in the local currency, the risks to another downgrade intensified and foreigners sold R1.3 billion worth of government bonds. The bank responded by blasting Mkhwebane’s report as reckless and questioned her understanding of the country’s constitution.
In the July update of its World Economic Outlook, the International Monetary Fund forecast global economic growth of 3.5% for 2017 and 3.6% for 2018.
SA’s performance diverges from the synchronised global economic upswing. Global confidence, industrial production and trade indicators all confirm a sustained strengthening of the global cyclical recovery.
“The recovery in the global economy presents upside opportunities, but South Africa’s recovery also hinges on addressing domestic structural bottlenecks and restoring investor confidence,” said Brixovia.
The economy’s second-quarter GDP update confirmed that the economy lifted out of the technical recession, with (production side) growth rising 2.5% quarter on quarter seasonally adjusted annualised versus -0.6 percent in the first quarter.
The positive figure was slightly stronger than market expectations of 2.3%.
However, GDP for the year is forecast to average only 0.5% y/y compared to last year’s 0.3% year on year.
“The global environment is quite positive with firming global recovery and stabilising macro environment support emerging market credit this year, but the country is de-coupled from the global growth.
"With the subdued growth, South Africa is caught in a low-growth trap since the global financial crisis” said Brixovia.
She added that the private sector’s incentives to invest is limited as a result of the continued policy uncertainty stemming from the slow progress in adopting key legislation is deterring investment in the mining industry.
“Most of the challenges that South Africa faces are of a domestic nature and they certainly include the political tension. This happens in many countries, but here it seems to be significantly impacting business and consumer confidence,” she said.
Moody’s expects the debt-to-GDP ratio to reach about 55% in 2018/19 and gradually continue to rise. Moreover, contingent liabilities, disruptions to growth and fiscal revenues, as well as interest rate and currency movements could lead to an even higher debt ratio.
On the bright side, South Africa has some credit strengths that support the rating at its current level such as a well-developed domestic financial market, a capitalised banking sector, a coherent macroeconomic framework and low levels of foreign-currency debt.
“Key institutions like the court system, the Reserve Bank, the auditor-general, among others, maintain their independence and are effective,” added Brixovia.
The main risks to outlook stem from the possibility that domestic political tensions will intensify in the lead-up to the ANC elections in December and the 2019 general elections.
“It is thus unlikely that a political consensus will be reached to support investment and allow for reforms that can sufficiently reverse the expected negative impact on growth and the government’s balance sheet,” she said.
According to Brixovia, the agency could stabilise the outlook if the government were to implement policies and reforms that ensured the continued independence and strength of policy institutions and reduced the value of guarantees to state-owned enterprises (SOEs).
“We would downgrade the rating if the strength and independence of institutions would notably diminish, emerging policy framework became less predictable and liquidity pressures were to re-emerge at SOEs that would elicit pronounced government intervention,” she said.