Ratings downgrade averted, but risks high

● South Africa has averted another ratings downgrade but the world’s largest ratings agency, S&P Global, has made it clear it will be monitoring how government executes policy to improve growth.

S&P held South Africa’s credit rating steady at BB for foreign currency and BB+ for local currency. Both have stable outlooks. This maintains the debt rating in sub-investment grade or junk status, a move that was widely expected ahead of the late-night announcement on Friday.

The news means that currency and bond yields may not weaken significantly in coming days. Debt costs have risen since April as bond yields spiked from 7.99% to about 8.66% on May 23, but retreated to 8.42% on Friday. The rand has also weakened since February as a result of heightened global risks.

Gordon Kerr, fixed-income specialist at RMB, said on Friday: “Local bonds continue to find their feet, even as the geopolitical environment sours.”

Bidding was mostly driven by offshore interest. Alvin Chawasema, a fixed-income trader at Sasfin, said: “The market has priced in a stay of execution.” The markets would have regarded developments at state-owned companies this week favourably, he said. Public Enterprises minister Pravin Gordhan made new board appointments at South African Express, Denel and Transnet. The cabinet approved the appointment of Phakamani Hadebe as permanent CEO of Eskom, where he had been acting since March.

Devin Schutte, head of investments at The Robert Group, said interventions to improve economic growth were key. “What measures are going to be implemented, not just talked about at a summit? I think that’s where they are going to hold us to account.”

S&P has nearly doubled its growth projection for 2018 to 2%. The IMF has forecast growth of 1.5%, similar to National Treasury’s projection in February, although Finance Minister Nhlanhla Nene indicated in parliament this week that growth may be higher.

President Cyril Ramaphosa intends to hold a jobs and an investment summit later this year. Ramaphosa hopes to raise $100billion in investment over five years.

Schutte said it was still a trying environment for corporate South Africa and this would feed back into the economy.

The IMF’s annual Article IV mission commences tomorrow. An IMF team visits countries to assess economic and financial policies with central bank representatives.