SA has one year to resolve ratings issue

Negative outlook by all three agencies Country remains on a path fraught with instability

SA will have to keep a careful eye on its balance of payments and fiscal deficits, and move closer towards political stability, if it wants to hold on to its investment grade credit rating in 2017.

This is because ratings agency S&P Global Ratings will have to resolve its negative outlook on the country’s credit rating within 12 months — by either changing it to stable or downgrading it. S&P held back from downgrading SA’s rating to subinvestment grade, or junk, status on Friday. It kept its rating on SA’s debt on negative outlook.

While the S&P decision meant SA has managed to keep its investment grade rating with all three major rating agencies, it also means the country is now on notice for a downgrade by all three.

Fitch changed the outlook the week before to negative on its rating, which like S&P’s is just one notch above subinvestment grade. Moody’s declined to take any action on SA’s rating last month, keeping it on negative outlook but two notches above subinvestment grade. All three have expressed concerns about SA’s weak growth and its political instability, both of which could weigh on its efforts to stabilise the public debt as it has promised to do.

Rand Merchant Bank chief economist Etienne le Roux said the fact that two of the agencies – Fitch and S&P – had lowered SA’s local currency rating by one notch this year suggested that SA remained on the wrong path and that even more effort was needed to prevent further rating slippage. Rather than patting ourselves on the back after the “no-junk” efforts paid off, policy makers, business leaders and labour must now more than ever double up on their efforts to prevent the worst.

Though S&P affirmed SA’s foreign currency rating, it took the local currency rating down one notch on concern about SA’s rising fiscal deficit and about the foreign capital inflows needed to finance it.

That narrowed the gap between local and foreign ratings, with the local one now just one notch higher on the S&P

scale than the foreign one. The local currency rating covers rand-denominated debt raised in the domestic market, while the foreign currency rating applies to hard currency debt.

The main reasons for S&P’s decision to affirm SA’s investment grade rating were the resilience of SA’s institutions, such as the checks and balances provided by the judiciary, as well as SA’s commitment to do fiscal consolidation despite a weak growth environment, and the improvement in the deficit in the current account of SA’s balance of payments in the past six months, S&P lead analyst for SA Gardner Rusike said.

However, he said S&P remained concerned about SA’s weak growth, and its ability to effect fiscal consolidation in a weak growth environment. Also worrying were the political tensions, even though some of the events of the past six months – such as the publication of the public protector’s state capture report — indicated a more constructive direction, Rusike said.

Nedbank chief economist Dennis Dykes said though all the ratings agencies had said SA needed structural reform, “they know we are not going to get it until we get political stability – but they now have a sense that they may be coming closer, which is why they don’t want to pull the trigger”.

Leaders of organised business and the CEO initiative that has been working with Finance Minister Pravin Gordhan to avert a downgrade welcomed the S&P decision as a “vindication of the efforts by government, labour and business over the past year”, but said “we see it as a beginning rather than an end of a process”.

The Treasury said S&P’s decision had been “a result of working together as South Africans”.

ALL THREE RATINGS AGENCIES HAVE EXPRESSED CONCERNS ABOUT SA’S WEAK GROWTH AND ITS POLITICAL INSTABILITY