S&P downgrades South Africa as rand slides

S&P Global Ratings on Friday evening lowered its long-term foreign currency sovereign credit rating on the Republic of South Africa to ‘BB’ from ‘BB+’ and affirmed the ‘B’ short-term foreign currency sovereign credit rating.

The outlook is stable.

At the same time, the long-term local currency sovereign credit rating was lowered to ‘BB+’ from ‘BBB-‘ and the short-term local currency sovereign credit rating was lowered to ‘B’ from ‘A-3’.

The outlook is stable.

“We also lowered the long-term South Africa national scale rating to ‘zaAA+’ from ‘zaAAA’ and affirmed the short-term national scale rating at ‘zaA-1+’,” the ratings group said.

“The downgrade reflects our opinion of further deterioration of South Africa’s economic outlook and its public finances. In our view, economic decisions in recent years have largely focused on the distribution–rather than the growth of-national income.

“As a consequence, South Africa’s economy has stagnated and external  competitiveness has eroded. We expect that offsetting fiscal measures will be proposed in the forthcoming 2018 budget in February next year, but these may be insufficient to stabilize public finances in the near term, contrary to our previous expectations,” S&P said.

The rand lost ground against the dollar, weakening almost 2%, to R14.11 against the greenback.

S&P said that the stable outlook reflects its view that South Africa’s credit metrics will remain broadly unchanged next year.

“It also speaks to our view that political instability could abate following the party congress of the governing African National Congress (ANC) in December 2017, helping the government to focus on designing and implementing measures to improve economic growth and stabilize public finances.”

It said that downside pressure on the ratings could develop if economic performance and fiscal outcomes deteriorate further from its forecasts. “Further pressure on South Africa’s standards of public governance, for example in our perception of a threat to the independence of the central bank, could also cause renewed downward pressure.”

S&P said: “We could raise the ratings if economic growth or fiscal outcomes strengthen in a significant and sustained manner compared with our base case. Upside ratings pressure could also rise if risks of a marked deterioration in external funding sources were to subside, in our view, and external imbalances decline.

“Upward pressure on the ratings could also develop were policy makers to introduce economic reforms to benefit job creation, competitiveness, and economic growth.”

Compared with its last publication in June 2017, S&P said it now projects lower real GDP growth of 0.7% in 2017 and 1.0% in 2018.

Moody’s Investors Service meanwhile, placed the Baa3 long-term issuer and senior unsecured bond ratings of the government of South Africa on review for downgrade.

“The decision to place the rating on review for downgrade was prompted by a series of recent developments which suggest that South Africa’s economic and fiscal challenges are more pronounced than Moody’s had previously assumed.

“Growth prospects are weaker and material budgetary revenue shortfalls have emerged alongside increased spending pressures. Altogether, these promise a faster and larger rise in government debt-to-GDP than previously expected,” it said.

The review, Moody’s said, will allow the rating agency to assess the South African authorities’ willingness and ability to respond to these rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures; structural economic reforms that ease domestic bottlenecks to growth; and improvements to SOE governance that contain contingent liabilities.

The review period may not conclude until the size and the composition of the 2018 budget is known next February. This will also allow Moody’s to assess the policy implications of political developments during the review period, the group said.

In the meantime, South Africa maintains credit strengths that still support its Baa3 rating. “These include deep domestic financial markets and a well-capitalized banking sector; a well-developed macroeconomic framework; and low foreign currency debt. Adherence to the Constitution and the rule of law continue to be the key pillars of strength of South Africa’s institutions.”

Ahead of the rating decisions, analysts had expected the worst.

  • A downgrade of LC and FC debt by Moody’s and a of LC by S&P – the worst case scenario – was put at a 10% probability;
  • A downgrade of LC debt by either Moody’s or S&P, but not both, was at a 40% probability; and
  • No changes from either was put at a 45% probability.

While economists have been bearish on South Africa, saying a downgrade to full junk is inevitable, they have been cognizant of the fact that the Friday ratings decision was very close to the ANC’s elective conference in December, which will have a profound impact on the country.

One of the biggest consequences of a full junk rating from these firms is that South Africa will be kicked out of the World Government Bond Index, which would lead to a forced sell-off of South African bonds.

The financial impact of this is staggering, with economists saying that it will lead to R100 billion disinvestment almost immediately, going to over R200 billion in the long-run.

Fitch’s rating, which has had South Africa in full junk for some time, does not impact the country’s standing in the WGBI, which is why the impact of its ratings wasn’t as hard-felt.

Ratings agencies have long issued warnings about South Africa’s low growth; high levels of government spending; stubbornly high levels of unemployment; and political and policy uncertainty.

Read: Fitch keeps South Africa’s credit rating at junk

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S&P downgrades South Africa as rand slides