How to avoid a downgrade in 2017
The hammering the global economy took this year is reflected in credit ratings for governments. Moody's, for instance, reports that it assigned a negative outlook for 26% of the countries it rates, the largest proportion since 2012.
Only 9% of the countries that Moody’s rates have a positive outlook. This is due to low economic growth, high public-sector debt, difficult politics and the risk of capital outflows from emerging markets.
South Africa has managed to maintain an investment grade rating from all three major rating agencies, though with a negative outlook. The agencies are most concerned with the country’s economic growth prospects. They have also pointed to rising political risk.
The role of entrepreneurs and SMEs
The ability of small and entrepreneurial companies to persevere in difficult economic times will contribute positively to economic growth and job creation, with the support of government investment in public infrastructure and policy measures to lower barriers to economic participation. However, there is risk that such measures will be rolled out very slowly.
The outcomes of the ratings reviews are positive for entrepreneurial growth. The cost of credit will not rise in the near future and international investment into the country has not been deterred. However, the challenges in the economy can be seen in high unemployment, inflation, slow retail trade sales growth and a contracting manufacturing sector.
Developing markets and the Trump presidency
South Africa, as an emerging market with significant investment and trade ties with the United States, needs to come to terms with a Trump presidency. This may spell years of economic volatility. The incoming president’s attitude towards international trade is, on the surface, hostile as he took issue with the kinds of trade deals and arrangements in which America is involved.
He sees this as benefitting countries such as China and Mexico at the expense of American production and jobs. For South Africa, this negative sentiment towards emerging markets will hit hard, as the rand becomes volatile in times of uncertainty towards developing countries. Trump appears to have limited insight into the developing world. However, as a businessman, he might grow into a pragmatic approach to trade and investment as the dust of his campaign settles.
About Trudi Makhaya
Trudi Makhaya is a consulting economist at Mercantile Bank.
