CNBC Africa is joined by Tatonga Rusike, Sub-Saharan Africa Economist, Bank of America Global Research.
We should focus now to the latest view on South Africa's economy coming out of Bank of America. The bank issuing a note earlier on today, or its latest note, just talking about the prospects of rating upgrades being likely in South Africa should the country deliver on its higher GDP growth targets, and also should the country reduce its debt to GDP in the next three years, although caution still remains. We are joined by the Sub-Saharan Africa Economist, Tatonga Rusike, for more on his research note and more on his view. Tatonga, thanks so much for your time. It is really interesting right now just given the fact that yourselves and a few of your colleagues in this space are talking about the prospects of ratings upgrades in South Africa. I mean, we have been looking at downgrades for the better part of the last decade, just given the structural bottlenecks that we have spoken about on many occasions prior, and also the electricity shortages that we have been experiencing, the bouts of load shedding, as well as the confidence when it does come to the governance of how the country is run. Just walk us through your view then on what needs to happen for the possibility of an upgrade in South Africa's economy becoming a reality. Thank you very much, Fifi, for the opportunity. I think it's important to say that two things have changed. I think one is less load shedding, which is a big deal for growth outlook, and then also with the elections, the government of national unity, which has ignited a positive confidence shock into the economy, anticipation of seeing further reforms. So those two things have been positive. Now, we've had the first MTBPS or mid-term statement from the Treasury last week. I think it was slightly negative, but on balance, still fairly in line with the targets that they have from February. I think it's important that the fiscal stance remains similar, which helps debt to GDP to stabilise and then to decline. If we are on that path, then we can start to see a turn in the ratings outlook. You may recall that we now have about four years since 2020 without any ratings downgrade or negative rating action. So the last ones were back in 2020 at the start of the pandemic. So things have been a lot more stable and a lot of the negative factors on weak growth were factored into the current rating level. So if we are talking about upside to growth, then that should also mean upside to ratings. But because growth has underperformed so much for so many years, rating agencies are going to be cautious and say, look, let's see them deliver real GDP growth that is close to 2%. And if that becomes a new normal, then perhaps we can start to consider on the positive trajectory. So this is movement in the right direction. It's just perhaps not yet there to start getting the positive outlooks before the end of the year. But surely I think getting into the first half of next year, we start getting the positive outlooks, which will then transition to perhaps upgrades in the coming years. Pardon me, but many of your colleagues have echoed that similar statement, Hatonga, just in reaction to the latest financial balance sheet of the country, as it were delivered by the finance minister last week to say that there were concerns around fiscal slippage, but in the main, it was a balanced budget. That's what you hear publicly. What you hear privately is concerns around the trajectory of Transnet and how Transnet may be needing more support in order for the country to actually move in the right direction. Just what is your view then on the risks of our logistical space and whether Transnet can continue and be effective in its turnaround strategy in the absence of any further support from this government that could actually also result in even further fiscal slippage than was detailed in the national budget? Yeah. So I think going into February, Treasury will have to make decisions. So they didn't have to make these decisions in October midterm statement, but February you have to make decisions. And Transnet is one of those spending decisions they have to make. While they assume that there will be no new support to Transnet, and if there's need for, you can assume that they could do some tax revenue measures. I think it's less likely to get something on the tax revenue measures. So Transnet is one risk. The other is also wage settlements that are higher than what is budgeted for. We've seen the unions asking for 12% and the Treasury is offering, or rather not Treasury, but government is offering 4.7%. The baseline in the budget is around 4.5. So wages will need to be determined. Transnet support will need to be determined. Then the third one is actually on the social grants, which is the social relief distress grant that's supposed to expire in March. It could be extended. So these are spending risks that decisions need to be made come February. What we are saying is Transnet is key, not just for financial support, but actually in the reforms for the logistics sector. So this is key for getting growth above 2%. So one way or the other, we've said Transnet is too big to fail and would be supported. But the amounts for Transnet are much less than ESCOM. So you could support Transnet without necessarily derailing the fiscal framework, because the amounts are smaller. We're talking about existing guarantee now is about R47 billion that could be used up by the fiscal year. So yes, you could make a similar cash injection into Transnet into the budget, in fact. But in terms of widening the deficit, the numbers are not so big and not have as impact as ESCOM. So it's possible to do so. But they have to think through and see this thing. So once these decisions are made and incorporated into the fiscal framework, it becomes also clear, I think, for rating agencies to see where the fiscal path, if it's still positive, then you start to see those positive rating actions coming through. So I think they'll stay the course, even if you include Transnet into the spending item, they are likely to stay the course. All right. Another element that was mentioned, in fact, by the finance minister himself, that is going to show up in the February budget is finality around monetary policy and whether we stick to this target band or whether we are actually going to pin ourselves down to a specific inflation point. Again, differing views as to whether a specific inflation point is one that can be a lot more growth enhancing. And obviously, debates around what the point is, although we do know where the South African Reserve Bank does stand. Just your thoughts, then, on the matter of a firm inflation target, how that changes the growth picture of South Africa's economy, if at all, which ultimately, again, leads to how the ratings agencies perceive the risk of doing business in the country. Yeah, look, I think monetary side is one of the positive factors from a ratings perspective. So, that's already supportive. A move to lower inflation target helps South Africa to compete with peers who already target lower inflation levels, I think perhaps levels such as 3%. So, the SAAB has made its case. And in terms of timing, you have the first half of this year where we forecast inflation just to remain, I think, around 4% or so. So, it is actually inflation forecasts that are below the target of 4.5%. So, in terms of timing itself, this is probably a good time to consider that step. But it is not perhaps in the hands of the central bank by itself. It needs concurrence from the Minister of Finance. And we've heard from the MTBPS last week that we may see a discussion paper around fiscal anchors being published in March. We also hope that we see more firm decisions being taken on a lower inflation target. I think it will be supportive of the competitiveness for SAE in a longer-term perspective as well. But there are also other issues that need to be dealt with, particularly tariff increases for administrative prices. For example, you will see ESCOM asking for tariff increase of around 36% for the next fiscal year. So, these kind of things would also matter. So, it's important to look at them also, I think, on a broader perspective. However, if we are to move to a lower inflation target, that also means that the central bank would be more cautious on interest rate cuts in the near term, particularly into next year, because they might keep policy rates at a higher level, wanting to anchor inflation expectations at a lower level. So, mental policy would be restrictive. So, that could be a concern. However, we still think that there will be likely an interest rate cut in November, January and March. But the risk of a lower inflation target, you may get less cuts in order to anchor inflation at lower level, which is good for medium-term, long-term competitiveness for South Africa. Thank you for that and some encouraging words you are leaving us with in terms of expectations of around four interest rate cuts taking us through to March next year.
Theme: Potential for South Africa to achieve ratings upgrades by meeting higher GDP growth targets and reducing debt to GDP ratio, as highlighted in Bank of America's research note.
South Africa's economy has been a topic of discussion for many years, with structural bottlenecks, electricity shortages, and governance issues creating challenges. However, Bank of America's latest research note points towards the possibility of rating upgrades for the country if certain conditions are met. Tatonga Rusike, Sub-Saharan Africa Economist at Bank of America, highlighted key factors that could lead to an upgrade in South Africa's economy. One of the significant changes that have taken place is the reduction in load shedding and the positive impact of the government of national unity following the elections, which has boosted confidence and the anticipation of further reforms. These developments have set a positive tone for the economy. The recent mid-term budget statement from the Treasury, although slightly negative, remains in line with the targets set earlier in the year. Rusike emphasized the importance of maintaining a stable fiscal stance to help stabilize and reduce debt to GDP ratio. He noted that if South Africa continues on this path, there could be a turn in the ratings outlook, with potential for upgrades in the coming years. While the country has seen stability in ratings over the past few years, achieving real GDP growth close to 2% will be critical in convincing rating agencies of a positive trajectory. Rusike suggested that positive outlooks could begin to emerge by the first half of the next year, leading to possible upgrades in the future.
"If we are on that path, then we can start to see a turn in the ratings outlook. You may recall that we now have about four years since 2020 without any ratings downgrade or negative rating action. So the last ones were back in 2020 at the start of the pandemic."
['South Africa economy', 'Bank of America', 'rating upgrades', 'GDP growth', 'debt to GDP ratio']