Fitch revises South Africa’s outlook to negative
Fitch Ratings revised the Outlooks on South Africa’s Outlook to Negative from Stable, while affirming the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BBB-‘, it said on Friday.
“The issue ratings on South Africa’s senior unsecured long-term foreign- and local-currency bonds have also been affirmed at ‘BBB-‘. The Country Ceiling has been affirmed at ‘BBB’.
The Short-Term Foreign and Local Currency IDRs and the issue ratings on senior unsecured short-term local currency securities have been affirmed at ‘F3’.
The rating on the RSA Sukuk No. 1 Trust has also been affirmed at ‘BBB-‘, in line with South Africa’s Long-Term Foreign Currency IDR.”
The revision of the outlooks on South Africa’s long-term IDRs to negative was driven by factional battles within the ANC, government debt, debt from state-owned enterprises (SOEs) and low GDP growth.
“The in-fighting within the ANC and the government is likely to continue over the next year.”
In Fitch’s view, this will distract policymakers and lead to mixed messages that will continue to undermine the investment climate, thereby constraining GDP growth.
It noted that while the economy may have started recovering from a series of shocks, business confidence remains depressed and investment has continued to contract.
“We expect only modest GDP growth of 1.3% in 2017 and 2.1% in 2018, although this is an improvement from 0.5% in 2016.”
The economy had been hit in 2015 and 2016 by electricity shortages, the worst drought in decades, a sharp fall in international prices for some of South Africa’s main mining commodities and rising policy uncertainty.
South Africa dodged a downgrade to “junk status” in both May and June. Rating agencies have been sympathetic towards South Africa’s current lack of economic growth, influenced by weak external demand, which has had an impact on exports, as well as the drought, said Renier de Bruyn, equity analyst at Sanlam Private Wealth.
A credit rating reflect the borrower’s credit worthiness. That is the likelihood that the borrower will pay back a loan within the confines of the loan agreement, without defaulting, explained Mampho Modise, a post graduate researcher at the University of Pretoria.
Junk status is associated with high risk and therefore, high borrowing costs. This is the main reason why a sovereign has to avoid being downgraded into a junk, or sub-investment grade, Modise stated in an interview published by The Conversation.
Read: Why credit ratings matter and why they can’t be ignored
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