SA still faces risk of a downgrade in six months

SOUTH Africa’s chances of repeating its escape from a junk credit rating next year are in the balance as focus intensifies on tepid economic growth and simmering political tensions.

S&P Global Ratings kept its assessment of the nation’s foreign-currency debt at one level above non-investment grade on December 2. S&P’s affirmation followed a similar move by Fitch Ratings, while Moody’s Investors Service rates the debt one level higher.

The reprieve may be short lived if the government does not act to accelerate economic growth, according to Piotr Matys, an emerging-market currency strategist at Rabobank in London.

“Comments from S&P imply that it is absolutely crucial for South Africa to accelerate the pace of implementing structural reforms to avoid a downgrade in the coming months,” Matys said. Prolonged political “infighting may delay an implementation of reforms, which would increase the odds that S&P may downgrade South Africa to junk”, he said.

Political turmoil has overshadowed the state’s efforts to boost investor and business confidence, such as recent proposals to stabilise the labour market. The slowest output growth this year since a 2009 recession will complicate Finance Minister Pravin Gordhan’s pledge to narrow the budget deficit to 2.5 percent of gross domestic product by 2020, from a projected 3.4percent this year, and to limit government debt.

S&P said political events had distracted from growthenhancing reforms and slow output growth continued to affect the nation’s fiscal performance and overall debt levels. While the government had identified important reforms and supply bottlenecks in the economy, “delivery has been piecemeal”, the company said.

S&P gave South Africa the benefit of the doubt, said Peter Attard Montalto, an economist at Nomura International. “This can’t continue forever and the downgrade of the local-currency rating is a crystallised view of increasing risk in the eyes of S&P,” he said.

The rand weakened 0.1percent to R13.818 per dollar as of 11.12am in Johannesburg, after rallying as much as 2.4 percent on Friday. Yields on rand-denominated government bonds due December 2026 fell 7basis points to 8.96 percent.

The National Treasury recognised what needed to be done and was committed to implement the reforms needed, it said after S&P’s announcement on Friday. “We can celebrate for a few hours, come Monday we must roll up our sleeves and get down to work and do what is necessary to make sure that come six months’ time we will not be panicking,” said Lungisa Fuzile, the head of the Treasury.

The economy would probably expand 0.4 percent this year and 1.2 percent next year, according to the central bank. That was not enough to reduce the nation’s 27 percent unemployment rate, said bank governor Lesetja Kganyago.

“The risk is still significant that we may see sub-investment grade on the foreign currency sometime during next year,” said Ettienne le Roux, the chief economist at FirstRand’s Rand Merchant Bank. “The key issue is the lack of (gross domestic product) growth.”