News in South Africa 2nd August:
1. US stripped of AAA rating:
The US was stripped of its top-tier sovereign credit grade by Fitch Ratings, which criticized the country’s ballooning fiscal deficits and an “erosion of governance” that’s led to repeated debt limit clashes over the past two decades.
The credit grader cut the US one level from AAA to AA+, echoing a move made more than a decade ago by S&P Global Ratings. Tax cuts and new spending initiatives coupled with multiple economic shocks have swelled budget deficits, Fitch said, while medium-term challenges related to rising entitlement costs remain largely unaddressed.
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades,” Fitch said in a statement.
Treasury Secretary Janet Yellen quickly responded to the downgrade, calling it “arbitrary” and “outdated.” Treasuries edged higher in early Asia trading after the Fitch announcement amid modest demand for haven assets.
“Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong,” Yellen said in the statement.
Fitch had warned that it was weighing cutting the nation’s credit grade back in May, when Democrat and Republican lawmakers were at odds over raising the nation’s borrowing limit and the US Treasury was only weeks away from running out of cash.
While that crisis was ultimately averted, Fitch nonetheless said that the repeated debt-limit clashes and eleventh-hour resolutions have eroded confidence in the nation’s fiscal management.
Tuesday’s statement also attributed the downgrade to the country’s rapidly swelling debt burden, which it forecasts to reach 118% of gross domestic product by 2025, more than two-and-a-half times higher than the ‘AAA’ median of 39.3%. The rating company projects the debt-to-GDP ratio to rise even further in the longer-term, increasing America’s vulnerability to future economic shocks, the report said.
2. New low for load shedding:
Despite some load shedding relief in June and early July, Eskom’s outage pattern is getting worse, with South Africans again experiencing a full week of permanent load shedding for the first time in nine weeks.
The latest Power Availability Statistics from independent energy analyst Pieter Jordaan shows that the week ending 28 July 2023 saw South Africa back to mid-levels of load shedding (averaging stage 4) after managing to see weeks of lower stages and frequent suspensions of load shedding during the day.
The turn in power availability is largely down to the inclement weather that has hit the country in the last few weeks, pushing up demand.
Looking at the longer-term view, however, Jordaan’s data shows that – barring a few ‘bumps’ of improvement along the way – South Africa’s power situation has continued to decline and hit a new low at the end of July.
Power availability has deteriorated to an average of 79% over the past 12 months – meaning that the country has effectively been in permanent stage 3 load shedding for the past year, when averaged out.
While South Africa has long hit its worst point on record for metrics like total hours of load shedding in effect (currently 4,545 hours), Jordaan’s data looks at more impactful points like blackout hours and the Power Availability Ratio (PAR) of the grid.
3. Prices increasing:
The vast majority of South African companies are raising the prices of goods and services to mitigate against economic challenges in the next 12 months.
Data from PwC’s 26th Global CEO survey showed that 71% of South African CEOs said their companies are already raising prices, while 15% are considering price increases.
This is a significantly higher proportion than global CEOs, with only 29% raising prices.
PwC attributes this discrepancy to the significant structural economic issues in South Africa, particularly the inconsistent supply of electricity and deteriorating infrastructure.
Global headwinds are compounded by these local problems, policy uncertainty, poor economic growth, and high unemployment.
These structural constraints limit economic growth and, thus, effectively cap the growth of companies in South Africa.
Two out of five South African CEOs believe their company will no longer be economically viable a decade from now.
The accounting firm’s baseline growth rate for South Africa is 1.3% per annum over the long term. This is barely above South Africa’s population growth rate of 1% per annum, meaning incomes will remain stagnant in the long term.
Poor economic performance and the subsequent rise in unemployment exacerbates the social challenges South Africa already faces, PwC said.
4. Business warns of unemployment highs:
South African business leaders told President Cyril Ramaphosa that the jobless rate could rise to 38.1% by 2030 without urgent action to solve the country’s energy, logistics and crime crises.
The forecast, which compares with a current unemployment rate of 32.9%, was included in a presentation made by business groups in a meeting with Ramaphosa on Tuesday. It was based on an average economic growth rate of 0.75% if no progress is made on those three impediments.
Unemployment in South Africa is already among the highest of more than 80 nations tracked by Bloomberg.
South African business groups are working with the government to try and arrest the slump in energy provision and the deteriorating rail and port services. Those issues, coupled with rampant crime and corruption, are crimping growth in the continent’s most industrialised economy.
If the constraints were successfully addressed the business groups, collectively known as Business for SA, forecast economic expansion would average 5% and unemployment would decline to 28% by 2030.
5. Sharp fall in business activity:
Absa’s PMI slipped to 47.3 in July from 47.6 in June.
According to the bank, while the decrease is marginal, it does mask substantial changes in some of the major subcomponents, such as the business activity index, which tanked almost 11 points.
All information sourced from articles posted by: Moneyweb, BusinessTech, DailyInvestor, Fin24, and BusinessDay.
