Junk status for South Africa? It’s not looking good
Ratings agency, Standard & Poor’s – which has South Africa’s credit rating at one notch above junk status – has expressed growing concern over the country’s economic growth.
Speaking at a conference on Friday (13 May), S&P Managing Director for sub-Saharan Africa Konrad Reuss said that the agency was concerned about South Africa’s dismal economic growth and its reliance on capital flows, Reuters reported.
“When we look at our announcement from December last year what really has come to the fore more than ever before is the economic assessment and the weakness in South Africa’s economy,” he said.
South Africa’s economy is barely growing, with growth revised down from previous expectations of 1.7% to 0.6% in 2016. The country has been marred by load shedding in 2015, low commodity prices, drought and political instability which has unnerved investors.
The negativity of Reuss’ comments are pertinent, given the more optimistic view held by Moody’s, which in its latest assessment of the country upheld the Baa2 rating (two notches above junk status).
Moody’s rating, despite a change to a negative outlook for the country, was hailed by government as a sign that its strategy to curb wasteful spending and to reverse capital outflows experienced over the first quarter of the year was working.
However, among the voices of celebration, economists and finance minister Pravin Gordhan warned that other agencies – such as S&P and Fitch – may not hold the same optimism.
A Reuters poll found that 15 out 16 economists expect the country to lose its investment status in 2016.
Both S&P and Fitch have South Africa at one notch above junk – with both agencies set to review their stance on the country in June. A cut from either agency will send South Africa below investment grade (“junk”), making it more difficult for the country to draw much-needed investment to its shores.
A junk rating 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.
Many analysts an economists say that a downgrade has already been priced into the market, and that at bare minimum – if everything inside and outside the country worked out in the most positive way – it would take 2 years for the country to recover from a junk downgrade.
More on South Africa
How long it could take SA to recover from junk status
What a ratings downgrade means for the rand
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