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Are you worried about ratings downgrade and its impact?

Posted By IRMSAInsight, 13 July 2014

South Africa’s economic outlook has in the past few years been subject of much debate and speculation. In 2008 – 2010, key factors of influence were mainly external and primarily centred around the global economic meltdown.


During this time, South Africa’s economic cushion was provided by the expansion work programs and the 2010 World Cup investments. There were also some wise economic decisions (such as the National Credit Act) and stringent economic management under former Finance Minister Trevor Manuel’s tenure which partially shielded the country’s exposure to the meltdown.


Unfortunately, this appears to no longer be the case as in recent times SA’s gloomy economic outlook is said to be “of our own doing”.  Experts point to factors such as: Economic policy uncertainty; Labour market unrest and Impact of unreliable electricity supply as the main impediments to our economic growth.


These factors have of course had a major impact in our Gross Domestic Product (GDP) growth which was 0.9% during the third quarter of 2013 and more recently has contracted by 0.6% in the first quarter of 2014.


Furthermore, the five month wage strike in South Africa’s platinum mining sector and a weak domestic and external demand were the main reasons Standard and Poor (S&P) downgraded South Africa’s ratings. Other rating agencies have also raised related concerns about SA’s economic outlook as rationale for their downgrade. For example, Fitch Ratings has changed the outlook rating from stable to negative, raising the risk of a downgrade from the current BBB rating. Both Fitch and S&P have expressed a lack of confidence in the government’s ability to tackle the country’s ingrained structural issues.


A credit downgrade is set to increase the cost of borrowing for the government. By extension the impact will also be on national treasury and our state-owned entities such as Transnet and Eskom who source funding on the foreign bond market. The private sector, initially banks, will also be affected and ultimately the impact will hit the consumer. Other experts have indicated that the downgrade could also add pressure on the Reserve Bank to hike interest rates.


S&P warned that it could lower the ratings if South Africa’s business and investment climate weakens further, if for instance labour disputes continue to worsen. The agency could also lower the ratings if external imbalances continue to increase or funding for South Africa’s current account or fiscal deficits becomes more difficult or costly. This could potentially result in South Africa losing its investment grade status.


For risk managers, the current dialogue around the gloomy economic outlook coupled with labour unrest, social unrest and other concerns about SA’s future are a cause for concern. As risk managers, the challenge is not only to identify potential risks but to serve as a channel through which the impact of these external but local factors are defined/quantified to address the going concern of each business.

As a Risk Manager:

·  Are you worried about the recent downgrades and will they directly affect your business?

·  Do you have specific risk remedies to the increasing labour unrest?

·  Is your company worried about ramification of a downgrade (i.e. interest rate increases)?


Let us know your thoughts in the comments section! 

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Comments on this post...

Abisha Kampira says...
Posted 15 July 2014
With regards to labour unrest an Income Management Model Framework is probably an answer to year-in year out labour unrest. Financial Models have gained ground on the South African industry with companies developing various models to try and:
• Reduce inconsistencies and discretion of human judgement where such judgement may not be very effective
• Create consistency in decision-making
• Predict the future and attempt to address risk while they are still small and manageable
An Income Management Model would comprise of a multi-party agreed formula and methodology in calculating future income increases within a specified time horizon, say 5 years. The Model would comprise the core of a legally binding agreement between labour unions and employers and would be developed by an entity agreeable to both parties.
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Kay Darbourn says...
Posted 15 July 2014
I wonder how many people fully understand the economics of our country, perhaps we need to educate our people better - across the whole spectrum, from Politicians to Labour leadership to the unemployed - so that the impact of decisions made are fully understood...
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Madeleine Black says...
Posted 15 July 2014
I agree Kay. There are many socio-economic factors that have been contributing factors leading to the labour unrest and wage strikes. Without a complete understanding of the impact that these causes have on our economy it is difficult to propose solutions. We have to look to the country's leadership to propose alternative wage negotiation methods with the unions that is constructive to the workers and to the country's economy. I would be interested to see how different companies' risk registers are being updated/affected with the ratings downgrade and current economic outlook in South Africa.
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Michael G. Ferendinos says...
Posted 16 July 2014
This is a very interesting piece and something that many emerging economies are dealing with. The question that I have is whether we place too much emphasis on the role of rating agencies as well as whether the information that they provide fully captures unique country contexts within the broader global economy. For example, every developed economy implemented various protectionist measures during their phases of growth. The neoliberal 'rules of the game' pertaining to economic policies are set by these developed economies, even though they did not follow them throughout their development.

I have provided a link to my thesis on development in the global economy as well as one that questions the efficacy of rating agencies...some food for thought.
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Nicola Loubser says...
Posted 16 July 2014
Interesting point Michael - I've certainly heard many debates regarding ratings being a bit of a chicken and egg situation - and suggestion that the act of changing the rating has brought about more significant consequences than the precipitating event.

Madelein - I too would love to know if people are evaluating this information against their risk registers . . .
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Zaid M. Omer says...
Posted 20 July 2014
I think we are asking the wrong question. The question I am asking myself is: "Are these the signs of a failing economy and the collapsing of good governance?"
I ask this question because of the downward pressure on economic activities causing turmoil in various aspects of SA life. The article effectively spells out some of these downward pressures. Some additional downward pressures include the following:
1) An over indebted middle class
2) Increased cost of doing business
3) Steady decline in water quality as well as quantity
4) Out of control fraud and corruption in all sectors
5) Unregulated public transport industry (taxis to be exact)
6) Ungovernable police and related public services
7) Drastic increase in number of people living below the breadline
8) Structural shortcomings in managing unemployment
9) A steadily weakening Rand
10) Decline in Governmental stewardship and leadership
11) Sustained poor performance in State owned entities... and still worsening
12) Mismanagement of mega-project risks
13) Deteriorating education system
14) Unsustainable public funds debt collection

I'm sure you can add more. The point is... is the ship sinking and can we see the signs? So what your 2015 predictions?
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Michael G. Ferendinos says...
Posted 30 July 2014
I completely agree Zaid, one point to consider however is whether this context is purely a reflection of South Africa or whether the same story is playing out in other similarly sized middle income emerging economies. If the latter is the case and these countries are subjected to the same external forces, should rating agencies not rather base their assessments on this macro level context?

Whether downward or not, personally I see several of the issues / pressures that you mentioned reported on a daily basis in countries like Brazil, Mexico, Turkey etc.

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