South Africa: Risk Assessment
Country Risk Rating
|B||Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable.|
Business Climate Rating
|A4||The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.|
Growth in the South African economy is likely to remain very weak in 2016. Industrial output will continue to be handicapped by persisting power supply problems and low mining sector prices. Agriculture, which was badly hit by drought in 2015, could again suffer as a result of El Niño in 2016. Services activity (finance, retail) could well make a greater contribution than other sectors.
Household consumption is expected to be held in check by debt and inflation, as well as the slower rise in wages and social spending. Private investment is likely to remain low, limited by high interest rates (raised to 6.25% in November 2015), and the lack of vitality in demand (internal and external) and reduced margins, in particular because of more costly inputs due to the depreciation of the rand. The government however should be continuing with its infrastructure projects. Finally, exports are likely to struggle given the weakness in demand, thus limiting their contribution to growth.
Inflation, relatively moderate in 2015 could increase in 2016. Higher electricity prices and the cost of food (as a result of the drought) as well as the ongoing depreciation of the rand are likely to boost inflationary pressures, despite low oil prices. The relative weak level of internal demand, combined with strict monetary policy, could however prevent it going above the ceiling set by the central bank (6%).
No room for maneuver in terms of the budget and persisting current account deficit
The South African government is looking to bring its budget deficit under control and stabilize its debt in order to avoid any further decline in its credit rating, resulting in the loss of its “investment grade” rating. The challenge is not inconsiderable given the feebleness of economic activity which is dragging down tax receipts, while any new tax rise, following that of 2015, would put further brakes on growth. Savings could be made thanks to slower rises in public sector wages, following the three-year agreement reached in May 2015. However, the infrastructure expenditure commitments would be difficult to revise, given the scale of the country’s needs (electricity production), and the cost of repaying the debt is growing. Support for certain state-owned companies, in financial difficulties (Eskom), could also be a burden on public finances, even though some of the spending is expected to be funded by the sale of State shareholdings (for instance in Vodacom). The debts of these companies will increase the already high level of public debt, although the structure of this (mainly local and long term) helps to mitigate the risk of over-indebtedness.
The current account balance could deteriorate in 2016. Exports are likely to be held in check by weak external demand, whether in China (the leading trading partner) or the EU, the lack of competitiveness of its industry and low prices for minerals (over 50% of exports, particularly gold and platinum). A contraction in imports, due to the lack of vitality in internal demand, could however more than make up for the export situation. Higher US interest rates could, by increasing the rate of capital withdrawals, impact negatively on the current account balance and the exchange rate for the rand, which already dropped 20% against the dollar between January and November 2015.
The banking sector, impaired by the concentration of loans to already heavily indebted households, could suffer with the slowing of the economy.
Ongoing political tensions and worsening business climate
Despite the comfortable victory of the ANC in the May 2014 elections, doubts remain concerning the political and social development of the country. J. Zuma has to compromise with the other members of the ruling alliance (COSATU, Communist Party) at the same time as his authority is being increasing questioned, which is reducing the ability of the government to define and implement reforms. The continuing failure to satisfy people’s expectations in terms of overcoming unemployment, poverty and corruption, remains a source of social instability. Strikes and demonstrations, which were mostly focused on the industrial sector (mines, metallurgy, etc.) are spreading (students in October 2015), and are evidence of growing general discontent.
South Africa has modern legal and financial systems and its ranking by certain World Bank indicators in terms of governance (rule of law, voice and accountability) has improved. Failings in terms of training, criminality and corruption are however handicapping the business climate.