South Africa downgraded to junk
Ratings firm S&P Global has downgraded South Africa’s sovereign credit rating to junk status, following the axing of former finance minister, Pravin Gordhan.
According to analysts, junk status has been an inevitability for South Africa for some time, as the country has struggled with debt, high levels of unemployment, incredibly slow economic growth and political uncertainty under president Jacob Zuma’s tenure.
By 18h05 on Monday the rand lost nearly 2% of its value against the greenback, trading at R13.67, having closed last week at R13.42.
- Dollar/Rand – down 1.91% to R13.67
- Pound/Rand – down 1.58% to R17.07
- Euro/Rand – down 2.11% to R14.60
S&P downgraded South Africa’s foreign currency rating to BB+ – officially sub-investment grade – while local currency debt has been downgraded to BBB- (one notch above junk).
Both ratings carry a negative outlook, meaning further downgrades may lie ahead.
Many analysts expected the ratings cut to hit late 2016; however, with a push from former finance minister Gordhan, meeting with investors and businesses and other stakeholders, the country was able to stave off junk status on hopes of a more positive 2017.
Sub-investment grade countries suffer from having their borrowing costs spike significantly, while many international investors are blocked by policy from investing in such countries or from buying their debt.
Last week, Zuma announced a cabinet reshuffle, which included the sacking of finance minister Pravin Gordhan and his deputy, Mcebisi Jonas, a move likely to cause further economic and political woe in the coming months.
Why South Africa was downgraded
According to S&P, the rationale for the downgrade reflects the view that the divisions in the ANC-led government have led to changes in the executive leadership, including the finance minister, and have put policy continuity at risk.
“This has increased the likelihood that economic growth and fiscal outcomes could suffer. The rating action also reflects our view that contingent liabilities to the state, particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner.
“In our view, higher risks of budgetary slippage will also put upward pressure on South Africa’s cost of capital, further dampening already-modest growth,” the group said.
The group also said that internal government and party divisions could delay fiscal and
structural reforms, and potentially erode the trust that had been established between business leaders and labor representatives (including in the critical mining sector).
“An additional risk is that businesses may now choose to withhold investment decisions that would otherwise have supported economic growth.
We think that ongoing tensions and the potential for further event risk could weigh on investor confidence and exchange rates, and potentially drive increases in real interest rates.”
S&P said that South Africa’s pace of economic growth remains a ratings weakness. It
continues to be negative on a per capita GDP basis.
“While the government has identified important reforms and supply bottlenecks in South Africa’s highly concentrated economy, delivery has been piecemeal in our opinion. 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,” it said.
Looking ahead
S&P said that its negative outlook reflects the view that political risks will remain elevated this year, and that policy shifts are likely – which could undermine fiscal and growth outcomes more than we currently project.
“If fiscal and macroeconomic performance deteriorates substantially from our baseline forecasts, we could consider lowering the ratings,” it said.
“We could revise the outlook to stable if we see political risks reduce and economic growth and/or fiscal outcomes strengthen compared to our baseline projections.”
Two other agencies are expected to deliver their reviews on South Africa in the coming weeks, starting with Moody’s on Friday (7 April).
Moody’s currently has South Africa at two notches above junk status, with expectations that the group will cut the country to one notch above junk.
Fitch meanwhile, has South Africa at one notch above junk.
Read: The ANC’s integrity commission asked Zuma to resign – he said no: report
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