SOUTH AFRICA DODGES THE JUNK BULLET
South Africa will end 2016 with its investment grade rating intact. This follows the decision by all three major ratings agencies to keep the country’s sovereign rating within the key investment grade scale.
However, the country remains at high risk of being downgraded to “junk” status in the coming months.
Last week, Fitch and Moody’s Investor Services announced their decisions. On Friday, S&P Global announced that it had cut South Africa’s local currency rating to the same level as our foreign currency rating of BBB – the last rung of investment grade – while at the same time keeping the outlook on both ratings as negative. The news caused the rand to firm to 13.88 to the US dollar, its strongest level for Friday, from 13.93 at 5pm, when the JSE closed.
“We lowered the long-term local currency ratings on South Africa because its fiscal financing needs are increasing beyond our previous base-case expectations,” S&P said.
“We also believe political events have distracted from growth-enhancing reforms, while low GDP growth continues to affect South Africa’s economic and fiscal performance,” the agency added.
“The negative outlook reflects the potentially adverse consequences of persistently low GDP growth for the public balance sheet. South Africa’s pace of economic growth remains a rating weakness.
“The country’s longstanding skills shortage and adverse terms of trade also explain poor growth outcomes, as does the corporate sector’s current preference to delay private investment, despite high margins and large cash positions.”
The CEO Initiative, along with Business Leadership SA and Business Unity SA, said: “The business community welcomes the decision by S&P to retain South Africa’s sovereign credit rating. We recognise that a lot of work is still necessary to reach higher levels of growth and we remain firmly committed to structural reform.”