SA still faces ratings challenge
Political uncertainty prevails
THE TUG-OF-WAR in the governing ANC could impact the economy negatively and lead to a downgrade, S&P Global Ratings (S&P) said on Friday when it granted South Africa a reprieve from a downgrade of its sovereign credit rating.
“Political events have distracted from growth-enhancing reforms, while low gross domestic product (GDP) growth continues to affect South Africa’s economic and fiscal performance and overall deck stock,” said S&P.
President Jacob Zuma moved to reassure foreign investors on Saturday after all three major rating agencies kept South Africa’s investment grade status, granting the scandal-prone leader a reprieve after prolonged political turmoil.
Zuma called for a focus on boosting growth and creating jobs and “assured international investors that South Africa remains an important and strategic investment destination”, a statement from the president’s office said.
The rand gained 2 percent against the dollar after S&P’s decision, but analysts said this could be a brief rally for the currency, warning that a downgrade loomed if the trend of political instability and slow economic reforms were not reversed.
S&P said it believed tensions and contestations were increasing in the run-up to the ANC’s June elective conference. “We think that ongoing continued tensions and the potential for event risk could weigh on investor confidence and exchange rates, and potentially affect government policy direction.”
Fitch and Moody’s also warned about political turmoil, saying it could derail economic growth, when they affirmed their ratings last week.
The ANC last week backed Zuma after several members of its national executive committee called for him to resign. A prolonged investigation into Finance Minister Pravin Gordhan also rattled financial markets.
The chief prosecutor, Shaun Abrahams, dropped fraud charges against Gordhan, executing a U-turn in a case that drew accusations of political interference.
Former finance minister Nhlanhla Nene was removed from office in December last year; the Constitutional Court ruled against Zuma in March; and the ANC lost some of the key cities in the August elections. S&P downgraded South Africa’s local debt by one notch to BBB, but kept its sovereign credit unchanged at BBB-, one level above junk status, while saying the economy is still struggling.
It retained its negative outlook on the rating.
A cut would take South Africa below investment grade, pushing its bonds out of global indices and preventing institutional investors from buying its debt. S&P’s decision means South Africa still holds investment-grade status with all three major agencies, although Fitch and S&P each assign it their lowest such grade with a negative outlook.
Arthur Kamp, an investment economist at Sanlam Investments, said before the S&P review: “A downgrade to junk of our foreign currency debt would probably invoke an adverse market reaction in the near term. A downgrade in our local currency debt would, for now, get less attention, unless it is more than one notch.”
S&P said: “Although less than one-tenth of the government’s debt stock is denominated in foreign currency, nonresidents hold about 35 percent of the government’s rand-denominated debt, which could make financing costs vulnerable to foreign investor sentiment, exchange rate fluctuations, and rises in developed market interest rates. We project interest expense will remain at about 11 percent of government revenues this year.”
The country needs to borrow about R165 billion this fiscal year to help plug its budget deficit, and the Treasury warned this month that its borrowing costs could double or triple if it falls into sub-investment grade.
S&P said general government debt increased to 45 percent of GDP in 2015, from about 30 percent in 2010 and it is expected to stabilise at around 49 percent only in 2018/19. – Additional reporting by Reuters