‘S Africa’s neg­a­tive out­look sign of down­grade to fol­low’

The Herald (Zimbabwe) - - Business News -

JO­HAN­NES­BURG. - More credit down­grades by Stan­dard and Poor’s (S&P) are likely in 2017, and South Africa is in the fir­ing line.

Ac­cord­ing to an­a­lysts, S&P is likely to down­grade South Africa’s sov­er­eign credit rat­ing to junk sta­tus by mid-2017.

In its last update at the end of 2016, S&P kept South Africa’s sov­er­eign credit rat­ing one notch above junk at BBB- with a neg­a­tive out­look.

The rat­ing agency said low gross do­mes­tic prod­uct growth con­trib­uted to the neg­a­tive out­look, and that the coun­try’s gross debt is ex­pected to rise to 54 per­cent by 2019 due to in­creas­ing fi­nanc­ing needs.

Ac­cord­ing to S&P’s Global Sov­er­eign Rat­ing Trends 2017 re­port an out­look, whether pos­i­tive or neg­a­tive, in­di­cates a one in three chance of a rat­ing ac­tion be­ing taken in that di­rec­tion. No­mura emerg­ing mar­kets econ­o­mist Peter At­tard Mon­talto pre­vi­ously stated that the S&P down­grade may be ac­com­pa­nied by a down­grade by Moody’s; the cur­rent rat­ing is two notches above junk at Baa2 with a neg­a­tive out­look.

Fitch is likely to down­grade in De­cem­ber 2017; its cur­rent rat­ing is BBB- with a neg­a­tive out­look.

No­mura be­lieves it would be dif­fi­cult for South Africa to gen­er­ate pos­i­tive per capita in­come growth, due to the po­lit­i­cal land­scape and lack of re­forms.

Mo­men­tum In­vest­ments (MMI) an­a­lyst San­isha Packirisamy shared sim­i­lar views in the group’s eco­nomic out­look re­port for 2017. MMI is of the view that there is a “strong chance” S&P may down­grade South Africa to sub-in­vest­ment grade by June 2017, ac­cord­ing to the re­port.

Trea­sury pre­vi­ously in­di­cated that a sub-in­vest­ment grade sta­tus could trans­late into higher in­ter­est pay­ments, a weaker rand, a higher cost of liv­ing, re­duced fis­cal space and lower con­fi­dence. This will re­sult in low in­vest­ment and poor job cre­ation.

It is also pos­si­ble that Fitch is likely to main­tain its neg­a­tive out­look, and there is a “high prob­a­bil­ity” that Moody’s could down­grade the rat­ing by one notch from Baa2, stated Packirisamy.

Econ­o­mist Dawie Roodt added that the down­grade is likely to hap­pen, but he is op­ti­mistic that S&P would make the de­ci­sion in the sec­ond half of the year.

He ex­plained that there are three main is­sues de­ter­min­ing South Africa’s fate. One is the fis­cal ma­trix, which is not good. “State debt lev­els are at record high lev­els and they will con­tinue to rise,” he said.

The sec­ond fac­tor is po­lit­i­cal sta­bil­ity, which is not nec­es­sar­ily neg­a­tive but still risky. “Things could go ei­ther way,” Roodt ex­plained, list­ing ANC suc­ces­sion fights as an ex­am­ple.

The third fac­tor is weak eco­nomic growth. “This may sur­prise on the up­side and be bet­ter than ex­pected, but still (be) weak.” De­pend­ing on what hap­pens, eco­nomic growth could be 1 per­cent pro­vided that there is no po­lit­i­cal in­fight­ing or rand weak­en­ing.

Im­prove­ment in the agri­cul­ture sec­tor alone, given rains fol­low­ing the drought, could add 1 per­cent growth to GDP. “Pretty much the drought or good rains stand be­tween (SA and) a down­grade.”

He added that mar­kets have al­ready priced in the down­grade, and that it would not have a big bear­ing on the ex­change rate cur­rency.

For the first time since early 2008, the num­ber of neg­a­tive out­looks as­signed by S&P in 2016 out­num­bered the pos­i­tive ones. “On De­cem­ber 31 2016, the 30 neg­a­tive out­looks out­num­bered seven pos­i­tive out­looks by a ra­tio of 4:1,” the re­port stated.

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