What junk status means for South Africa
Ratings agency Standard & Poor’s has warned that any deviation from the South African fiscal policy under new finance minister David van Rooyen could lead to a credit downgrade.
Last week, ratings agencies downgraded South Africa’s credit status to one notch above “junk” with little hope that the country will pick itself out of an economic slump.
On Friday (4 November) ratings firm Fitch downgraded SA’s credit rating by one notch to BBB-, the lowest investment grade. This was due to a slowing economy and rising debt, it said.
The group revised its growth prospects for the country down from 2.1% to 1.4%, and the projection for next year has been changed from 2.3% to 1.7%.
Fitch’s downgrade brought it in line with other ratings agency Standard & Poor’s which has the country at BBB-. Moody’s has the country one notch higher at Baa2 (a BBB equivalent).
While Fitch has assigned South Africa’s position as “stable” – S&P changed its outlook to “negative”, anticipating even slower growth in the country than before.
This puts South Africa at very real risk of becoming a junk country, which has substantial implications for investment.
Professional investors, such as hedge funds, pension funds and asset managers are prevented (by policy) from investing in junk countries.
Former Reserve Bank Governor, Tito Mboweni last week warned that “a dark cloud, mist or fog is gathering upon us as a country”.
He said that the country needs an “immediate defence mechanism” to avoid falling into a junk rating. “We cannot afford to become junk status,” he said.
“Junk status as we know translates automatically to cost of borrowing, re-ordering of corporates on the investor’s horizon within his or her rules or within certain indices like the MSCI. The immediate defense mechanism is based on three pillars: a credible fiscal stance (we dare not deviate from the Budget stance we adopted in October, please!); re-enforce central bank independence (I know this is intangible, but let’s do it!); and finally, respect for all other independent institutions (the judiciary and chapter nine institutions).”
South Africa’s credit rating levels peaked between 2008 and 2011.
The ratings firms have laid South Africa’s economic turmoil squarely at government’s feet.
Analysts and economists have warned that, unless President Jacob Zuma’s administration changes tack, the country is in serious risk of being junked in the next round of ratings.
Looking at South Africa’s credit rating history, it’s clear to see that the country has suffered ratings cuts consistently during Jacob Zuma’s tenure.
Zuma took over the presidency during a global economic crisis which took a number of years to overcome.
Since global recovery, however, the presidency has not managed to overcome economic challenges such as widespread unemployment and corruption and labour unrest.
Alarmingly, former finance minister, Nhlanhla Nene was pushing back against unchecked spending by government, and was forcing politicians to tighten their belts- a move which analysts say cost him his job.
Zuma announced on Wednesday evening (9 December) that Nene had been removed from the finance portfolio to be replaced by the unknown David van Rooyen.
Economists have stated that the move will likely see the economy fully under Zuma’s control, with expectations that spending will continue unchecked – including the fast-tracking of a R1 trillion nuclear build deal.
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