Will South Africa be junk by the end of June? Here’s what to expect

With ratings agencies Standard & poor’s and Fitch set to give their verdict on South Africa’s credit rating in June, this is what you can expect.
According to financial group, Nomura, a credit rating cut to junk status is inevitable, but may not happen in June, as the country is not in a “flash” decline into recession, but has rather been on this path for a while.
“Ratings agencies are not the fastest moving entities, and South Africa is not the most dramatic ‘flash bang, fiscal cliff, sudden stop, recession’ story,” said Nomura economist Peter Attard Montalto.
“It is a story of the grinding under-performance of an economy held back by uncertainty, lack of policy cohesion, lack of key reforms and frequent policy mistakes.”
As such, the only immediate change the firm sees is that of Fitch joining S&P at having a negative outlook towards the economy, with both keeping the rating at one notch above junk until at least November/December.
There are two key sets of ratings changes this year: now (and a few weeks back for Moody’s) and after the mid-term budget review in November/December.
Here is what is expected to happen:
Standard & Poor’s: hold (BBB- with a negative outlook)
According to Nomura, S&P already sees South Africa as junk in the back of their minds.
This is contingent on low growth and a lack of reform, especially around expanding contingent liabilities.
“We do not believe S&P will be shocked to the upside and so we expect it to deliver a sub-investment grade rating. The process, however, is evidence based – the agency needs to confirm this view with more growth data and see a lack of reform through a longer period this year,” it said.
Notably, the group believes S&P will hold the line for now, because the rating decision is just a little early vs the Q1 GDP data which is out later in June – so the agency doesn’t have much more real economy data than it did in December.
Despite the expectation the S&P will hold the rating – the accompanying statement is expected to be bleak, contrasting the more optimistic view held by Moody’s.
Fitch: hold, outlook change to negative (BBB- with a negative outlook)
Unlike other the other ratings firms, Fitch is yet to comment on the current political landscape, with the last update pre-“NeneGate” in December.
Nomura expects this to weigh on its rating review.
With the politics in the mix, Fitch is expected to downside growth risks outweighing short-run fiscal stability, aligning closer with S&P’s negative outlook, than with Moody’s more upbeat approach.
“An outright cut in the rating is possible but we assign only a moderate probability to one. We can see such a move as possible given the political situation and Fitch taking a more sceptical view on medium-run reform potential,” Nomura said.
The graph below shows Nomura’s expected Ratings outcome.
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