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!