SA junk status: “Expect the worst”

Standard Bank’s chief economist says South Africans should expect the worst, as ratings agencies S&P and Fitch complete their meetings in the country ahead of a rating verdict next month.

“While we pray and hope for a reprieve, it would be sensible and pragmatic for any business person and anyone engaged in the economy to anticipate the worst,” Standard Bank chief economist Goolam Ballim told Reuters.

A team from ratings agency Standard & Poor’s has completed its meetings with the South African government and businesses in the country, and will prepare its verdict for 3 June 2016.

S&P, along with Fitch, have South Africa’s credit rating at one notch above junk status. While Fitch’s rating is set to stable, S&P has the outlook at negative, which puts South Africa in an extremely volatile position.

Junk status for South Africa would push the country’s debt costs higher, and would prevent investors and hedge funds from investing in the country – many of which are prevented by policy from doing so.

In the short to medium term, a downgrade would push the South African rand even higher against the dollar – as seen in markets such as Brazil – which in turn would put even more pressure on South African consumers who are already stretched to their limit.

Economists have argued that the impact of a junk rating wouldn’t be as extreme as widely believed, saying the market has already factored such a rating into prices – however, Ballim has questioned if this was the case, as South African markets have not shown the same levels as Brazil did before it was pushed into junk.

Recently, ratings agency Moody’s upheld South Africa’s credit rating at Baa2 – two notches above junk – with a negative outlook. The group expressed hope and optimism in the country’s prospects to reverse economic slow-down.

Credit rating history 1994-2015
Credit rating history 1994-2015

While this sparked hopes that other ratings agencies would hold similar views, Stats SA on Monday revised reported quarterly growth for 2015, showing that the country’s economy had slowed even more in 2015 than previously thought.

Last week, the South African Reserve Bank cut its 2016 growth forecast to 0.6% from 0.8%, reflecting the risk the economy will tip into recession. Major sectors are already in decline.

More on the SA economy

This is how close South Africa came to a recession in 2015

South Africa GDP grows above expectations

Why South Africa will enter recession this year

Recession still a reality in South Africa

World Bank’s bleak picture of South Africa ‘flirting with recession’

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SA junk status: “Expect the worst”