Credit ratings SA

Reasons
Rating agencies look at a range of factors (NOT ONLY ECONOMIC FACTORS) when
rating. Political factors also determine the creditworthiness:
o Ability to repay loans (when they become due)
o Willingness to pay loans
Ability to repay loans:
o depends on ability to collect taxes in future so that SA can meet debts and
other social commitments.
o 2015-2016 Last year SA missed revenue target by R30bn.
o The economy needs to grow by collecting more tax
Willingness to pay:
o Relies on the political framework and stability in SA
o Eg. Govt. may choose to finance army rather than pay interest on loans
Recent political instability cabinet reshuffle
o Political tensions can lead policies and programs not being implemented (e.g.
fiscal policy plan set by Pravin Gordan)
o Weak political system, leads to corruption and critical resources leaking out
rather than being spent on their intended causes
Slow economic growth
Other reasons:
o Heightened political and institutional uncertainties (because of the changes
in executive leadership cabinet reshuffle) will likely delay fiscal
(government) and structural reform. Cabinet reshuffle cause change in
direction of economic policy
o Internal government and party divisions are likely to further erode business
sentiment with negative implications for fixed investment and GDP growth.
o Further likelihood of extraordinary govt support to SOE is a threat. Reshuffle
to undermine (or reverse) change in direction of economic policy

Effects of downgrade
Increase in risk premium (higher risk for investors, therefore higher return)
INCREASE in borrowing costs, undermine investor confidence, will likely reduce the
attractiveness of SA bonds at auction; and so negatively how easily SA can borrow.
This, in turn, will have a negative impact on SAs government finances, with
government trying to trim how much money it owes and still spend on
infrastructure.
Higher borrowing costs increase the cost of repaying government debt, and without
a substantial, and sustainable curtailment in government expenditure and rise in
 revenue, increase the chance of further credit downgrades. Upwards pressure is
placed on interest rates (weaker economic growth) and rand weakness (as investors
lose confidence and sell SA portfolio assets) which exacerbates the situation,
reducing further governments capacity for expenditure, including existing social
welfare grants.
Pressure will be placed on South Africa's cost of capital, the cash the country spends
on infrastructure projects, further dampening already-modest growth.
A further downgrade could result in an outflow of investment funds from bonds and
equities as many local and international investment funds are mandated to place
their money in investment-grade jurisdictions only

Actions

Monetary policy (pg 227): It is not certain that monetary policy can achieve economic
growth by adding reserves to the banking system as SARB cannot guarantee that banks will
make the loans and increase the money supply. If banks seek liquidity and are unwilling to
lend it will be of no avail. Businesses can also not borrow the excess reserves. Public can use
money paid to them for securities by SARB to pay off bank existing loans. Expansionary
monetary policy is not a cure for business cycle.

Fiscal Policy (pg 416): The fiscal policy is to a larger extend based on the ideas of British
economist John Maynard Keynes (18831946), who formulated fiscal policy principles, with
belief that governments could influence economic performance by increasing or decreasing
taxes and adjust government spending. Fiscal policy is deliberate changes in government and
tax collections designed to achieve full employment, control inflation and encourage
economic growth (fiscal simply means financial).

The aim is to reduce spending while stimulating economic growth

Reduction and management of spending:
o State departments:
Irregular spending increased from R27.4bn to R62.7bn in 1 year
controlling and curtailing spending by the public sector
saved funds can be used more effectively to stimulate economy
o SOEs
Experiencing huge financial losses and requiring govt bailouts
Eskom requires R70bn, 50% through govt guarantees
Put hold on R1 trillion nuclear deal
SABC loss = R411 mill
SAA loss = R4.5bn
o Non-productive spending in welfare
Govt maintain current level of spending through inflation increments
Stimulating economic growth
o Demand stimulation
 Invest in export industry
Address legislative impediments in areas like mining and agriculture
Capacity Development Supply expansion to stimulate GDP
o joint task between public and private sector
o will result in job creation (unemployment @ 26.5%)
o invest in skills development by funding required skills in economy
o support the development of SMMEs through funding and other support
mechanisms
SMMES account for 40% of GDP in SA and 90% of job creation from 1998-
2005
significant driver of GDP and the primary job creator
Political instability and Policy uncertainty
o Politics and policy play a crucial role in fiscal policy, due to the impact they have
on investor confidence as they reduce stability
o Political and policy uncertainty - Radical economic transformation or Inclusive
Growth, Expropriation of land without compensation or Willing seller-willing
buyer.
o The latest study by McKinsey (2017) highlights geopolitical and policy concerns as
major growth constraint issues for executives globally. Treasury therefore, has an
arduous task at hand to re-assure the investors that the new Minister will continue
supporting the existing fiscal policies. Deviating to the unknown and the so-called
radical economic transformation may lead to further downgrade by the CRAs
(S&P, 2017).

A sustainable way to increase revenues generated from tax would be to launch an

amnesty program which would result in the collection of significant repatriated funds
and tax payments while expanding the revenue base. The other option is to strengthen
tax collection efforts to reduce tax avoidance and tax evasion.