Fitch vs Treasury: Is SA’s debt outlook improving?

You can also listen to this podcast on iono.fm here.

JIMMY MOYAHA: The South African story is quite an interesting one. We’re going to look at two aspects of our economy.

We’re going to take a look at the reflections from last week’s mid-term budget policy statement, where National Treasury projected that it sees debt coming down.

The ratings agency known as Fitch has since come out to potentially disagree with some of the aspects and some of the findings of National Treasury.

Read: Fitch diverges from National Treasury on debt outlook

We’re going to explore that, but we’re also going to see if we can take a look at today’s announcement by Stats SA on the rebasing of South Africa’s economy.

Read: SA economy 5.3% bigger than thought after GDP rebasing

I’m joined on the line by director and chief economist at the Efficient Group, Dawie Roodt, to take a look at this and see what we make of these developments.

Oom Dawie, lovely having you on the show, as always. Thanks so much for taking the time. Let’s start with that Fitch expectation – or the Fitch commentary – around South Africa’s picture differing from what Moody’s has put out, and their expressed opinions. Give us a sense of where Fitch’s divergence comes from.

DAWIE ROODT: Yes, hello, good evening to you. This is Oom Dawie, as you say.

Jimmy, a better place perhaps to start is to actually start with the rebasing of the South African economy, because we’re talking about the debt-to-GDP ratio and the GDP numbers that have been revised.

ADVERTISEMENT

CONTINUE READING BELOW

The minister of finance, based on the previous GDP numbers, reckoned that the South African economy’s debt to GDP will probably stabilise.

Some of the rating agencies disagree with that. They think that the debt-to-GDP ratio will continue to go [up] – and I actually agree with them.

And the main reason why I agree with them is because I do not believe the economy is going to grow at 1.6% next year and 2% the year thereafter, based on what the minister of finance said in his medium-term budget policy statement last week.

But, having said that, Stats South Africa – as you mentioned – revised South Africa’s GDP numbers, and the South African economy is actually bigger than we thought previously.

Now, that is not going to affect the debt numbers as such, but it’s certainly going to affect the ratio of debt as a percentage of GDP, which is certainly going to be lower than we thought previously.

Previously we thought the debt is probably going to stabilise at about 78%, 79%.

And now that the economy is actually bigger than we thought previously, we’re talking about the whole thing coming down to probably about 74% or maybe 75% or so. So there are many moving parts here.

The real question here is: Is the South African economy going to grow or not? That is actually the underlying question.

The answer to that is: I’m afraid I’m not that optimistic. I think this year economic growth is probably going to be in the region of 1.7% to 1.8%, and next year I don’t see 1.6% – as the minister of finance thought. And the year thereafter also not a 2%, unless we make some significant changes to macroeconomic policy.

We are kind of stuck in a growth trajectory of about 1%, or perhaps just over 1%.

JIMMY MOYAHA: Oom Dawie, can we take a look at this rebasing in more detail? It’s something that doesn’t happen very often, and I can imagine that when it does happen it does tend to have a positive effect – as it has in this case.

But we can’t be reliant on something that isn’t a regular occurrence, can we?

DAWIE ROODT: No, no. Well, nothing has really changed.

Let me just make a comment about economic statistics, economic data. Just about all economic data are estimates.

There are some hard numbers, like for example the exchange rate; you can actually see what it is, you can see what the bonds are trading at, you know what the what interest rates are. So those sorts of numbers are actually hard numbers.

But for the rest of those economic data, most of them are estimates, and economists don’t even agree among themselves about what should be included in a basket of CPI, of inflation, for example – and economists certainly do not agree what should be included in GDP numbers.

ADVERTISEMENT:

CONTINUE READING BELOW

There’s a lot of debate about what should be included, but there’s a kind of standard, and there are certain ways of getting all these data.

Every five years or so, Stats South Africa – and they’re supposed to do it every five years – is supposed to revise all of this and see if the economy still looks the same as previously.

The economy never looks the same, because the nature of economic activities keeps on changing.

A very good example is that in the year 2000 cellphone usage was much, much lower than today, and we included cellphone usage – and it’s playing a bigger role in the South African economy today than in the year 2000. That’s one example. There are many other examples.

So they revise it every now and again, and they also improve on their data collection.

And after they’ve done that, we realise that the South African economy is actually a little better or a little bigger. It’s not bigger – it’s just the way that we measure this.

Better information and some change in some definitions – that gives us a better indication or better idea of the size of the economy.

But the big plus, of course, is that certain ratios – like the deficit and the debt numbers – will come in lower now because we realise that the economy is bigger.

But when we look at economic growth, economic growth is still probably going to be in the region of what I’ve said – about 1% or so over the next few years. I hope that makes sense.

JIMMY MOYAHA: Oom Dawie, that rebasing and the increased measurement, I suppose, of the South African economy – I want to take a look at what that could mean for rating decisions going forward.

We know that Fitch is set to give us a rating decision on the 11th of December. We know that S&P and Moody’s will deliver their decisions in November. So before the end of the year we will have all three rating agencies comment on South Africa.

What do you think this is going to fuel in terms of how they see the economy in South Africa?

DAWIE ROODT: Well, the South African economy, as it turns out, is about 5% bigger than we thought previously. Some countries rebase or recalculate the size of their economies; I can remember some time ago Nigeria did that and they realised that the economy is about 25% bigger than they thought previously.

So 5% is not really going to make much of a difference. But it’s not that level, Jimmy, that really matters here. It’s more the direction, the trend, that really matters.

And the trend has been an upward trend in recent years, and I think the trend is likely to stabilise. The minister of finance also indicated that the trend is likely to stabilise at about 89%.

ADVERTISEMENT:

CONTINUE READING BELOW

Fitch reckons it’s going to keep on going up a little, and I also reckon it’s probably going to go up a little. So the same trajectory probably can be expected. Currently, debt to GDP is at about 74% – I’m getting confused with all these numbers, 74% or so – and it’s probably going to go up a little over the next couple of years as well.

I do not think that is going to affect Fitch’s decision that much, but some numbers certainly do look better, and the most important one here is the deficit as a percentage of GDP, which is likely to come down, and come down quite nicely.

JIMMY MOYAHA: Oom Dawie, before I let you go, what does that then mean for the attractiveness of South Africa from an investment perspective? The rebasing is one part of it; the growth is the critical part that you mentioned. If we’re not able to evidence growth, we’re not going to attract investment into the South African economy.

When we look at that investment story, how do we position South Africa’s economy to be able to attract that investment and the growth?

DAWIE ROODT: Well, all in all, what we realise now is we have a slightly bigger economy to play around with.

But [as for] certain kinds of assets, I would look, for example, at the capital market and the financial market, generally speaking. I think those will remain attractive, but that is mostly to do with the way that monetary policy is maintained in South Africa.

For the rest of the economy, will you start a factory? Will you start a new mine in South Africa?

I think the normal obstacles that we have are still there, and we have to do something about those kinds of obstacles.

So certainly a slightly better position than that in which we are, but this is not going to change that much to the outlook for the average South African.

What we can say now is that the economic statistics are a little better than previously.

JIMMY MOYAHA: The numbers look a little better, but economic growth is still the fundamental building block that we need to be focusing on. It is the critical aspect that is the differentiator between whether or not we see an improved South African economy or a stagnant one.

We’ll have to leave the conversation on that note. Dawie Roodt, director and chief economist at Efficient Group, joined us to share his thoughts on Fitch’s disagreements with National Treasury, but also on South Africa’s rebasing of its economy.

#Fitch #Treasury #SAs #debt #outlook #improving