Ratings agency S&P Global has given South Africa the benefit of the doubt, for now, and is holding the country’s credit rating at one notch above junk at BBB-, with a negative outlook.
The reprieve is in-line with what analysts and economists expected – though the risk is far from over: South Africa needs to do a lot of work to avoid a rate cut at the end of the year.
According to S&P, low GDP is putting the country’s economic metrics at risk and could eventually weaken the government’s social contract with business and labour.
The group also highlighted rising political tensions, which are accentuating vulnerabilities in the country’s profile.
However, on the fiscal side, the government is showing greater resolve to reduce fiscal deficits at a faster pace than the firm had previously expected, which is why it was holding back on a cut – for now.
The outlook for the country remains negative, reflecting the potential adverse consequences of low GDP growth, and signaling that a ratings cut could be waiting at the end of the year if policy measures don’t turn the economy around.
Twelve of 13 economists and analysts surveyed by Bloomberg in April said they expected S&P to lower the rating to non-investment grade by the end of this year, with four expecting the downgrade to BB+ to happen this week.
The next big hurdle to be faced is with Fitch Ratings – which is expected to give its country review this month. Economists are expecting South Africa to dodge a junk rating from Fitch this time around as well – but anticipate a change in outlook to negative.
A cut to below investment grade would push up South Africa’s borrowing costs, making it harder to plug a budget deficit projected at 3.2% of GDP in the 2016/17 financial year.
The move will push the rand higher against the dollar, and will lead to an exodus of investors, who are barred via policy from investing in junk countries.
The South African rand, having made strong gains against the dollar thanks to weak jobs data out of the US on Friday, rallied further after the announcement, trading at R15.15 to the greenback at 17h45.