BUSISIWE MAVUSO: Upgraded credit rating by S&P Global boosts SA’s allure to investors

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Last week’s decision by S&P Global to revise its outlook for SA’s creditworthiness from stable to positive is the first clear change in direction by a ratings agency in several years of downgrades. I hope it marks the beginning of a recovery in the country’s credit ratings, leading it back to investment grade. It was testament to the achievements of the government in stabilising what had been a spiralling debt situation, that had all of us in business nervous that the state was headed for financial collapse.

The decision coincided with the World Economic Forum’s Davos meetings, at which the world’s decisionmakers from business, government and NGOs gather to discuss pressing issues. Of course, the war in Ukraine and rising inflation dominated the discussions, but thanks to rising commodity prices and the improved debt outlook SA has been popular among global investors.

Due to the war, combined with China’s lockdowns, SA is in a relatively stronger position than before. Add in the structural reforms that are poised to unleash significant investment into private electricity generation, the auction of critical mobile spectrum and other progress ranging from restructuring Eskom to visa reform, and SA has gained an elevated status among international investors.

The relative picture is often hard to see from home. SA is often compared with Turkey, but that is now a country where inflation is running out of control. Instead of raising interest rates when inflationary pressures started rising last year, Turkey cut them, and inflation is now at about 70%. In SA we have a well-respected central bank with a clear inflation mandate on which it is independently able to deliver. It is a far more attractive proposition in the global marketplace for capital.

Even the investment allure of China, which somehow is still categorised as an emerging market, has diminished after its regulatory attacks on the technology sector and zealous attempts to stop Covid-19 through sweeping lockdowns that have repeatedly shut down its factories and ports.

Commodities boom

The most critical factor in SA’s positive performance is the Reserve Bank and National Treasury, which have been firm in delivering on their promises. The Treasury has kept the fiscal trajectory on track to reduce sovereign debt over the long term, while the Bank has been raising interest rates steadily since November last year. That has so far kept inflation under control, with CPI remaining unchanged in April at 5.9%. Contrast that with Turkey, and even developed countries such as the UK, where inflation is now more than 9%. It must be a first for SA to be facing a better short-term inflation outlook than the US.

These things are noticed. In announcing its positive outlook S&P cited the favourable terms of trade stemming from the commodities boom, as well as improvement in the implementation of key reform targets under Operation Vulindlela, overseen by the office in the presidency, which with the Treasury works to overcome obstacles to reforms.

One of those blockages has recently been overcome with Operation Vulindlela’s assistance. Earlier this month Nersa registered two 100MW solar power plants to be built by a private company. The threshold to build energy generation plants without a licence was lifted from 1MW to 100MW in June 2021, but applications were bogged down by bureaucratic procedures still required for approvals.

That was identified as an obstacle to the key reform of enabling the private sector to generate electricity, which is needed to help overcome the country’s electricity supply deficit and end load-shedding. It was an important victory, and hopes are high that approvals for more megadevelopments will quickly follow.

Crucial timing

Inflows into SA’s equities markets have been strong this year, during a rate-hiking cycle in the US which has pushed yields of US Treasuries up sharply this year. We have long feared the fallout of the turn of the global rates cycle, which risked turning global capital flows away from SA’s borders and back to the US. But thanks to the positive reforms that have been delivered SA has been able to differentiate itself from other emerging markets.

The timing has been crucial and it shows how positive reform buys SA breathing room. It cannot let up now though — the country must redouble efforts to drive reforms and continue the positive momentum. The global economic outlook is not good, it is only by pressing on that SA will be able to outperform in a difficult economic environment.

The challenge is to keep moving forward with reforms, particularly those designed to fix energy and transport systems, and to get the R1-trillion infrastructure programme rolled out meaningfully. It is then that investment rates will pick up and companies will be able to expand, generating taxable revenue and employing more people as they do so. That is what the future holds if SA stays the course.

• Mavuso is CEO of Business Leadership SA. This article first appeared in Business Day.

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