Ratings agencies will in all likelihood hold off on a sovereign ratings downgrade, as such a move could justify the removal of Finance Minister Pravin Gordhan.<\/p>\n
This is the view of Gina Schoeman, South Africa economist of global bank Citi, who said in a company note issued on Monday that ratings agencies would not want to be seen as the \u201ccatalyst\u201d of the removal of Gordhan.<\/p>\n
\u201cWe are sure rating agencies are less tolerant now of political uncertainty than before. But for now, as long as the Finance Ministry remains as is, we suspect ratings agencies will remain uncomfortable being politicised.<\/p>\n
\u201cThis means that the agencies may well suspect that a downgrade decision right now would justify the removal of Gordhan. This could further sway to postpone a downgrade decision to 2017 in our view,\u201d Schoeman said.<\/p>\n
Moody\u2019s and Standard & Poor\u2019s (S&P) will release their credit ratings reviews on 25 November and 2 December respectively, while Fitch is expected to follow suite in the near future, although no calendar dates have been provided yet.<\/p>\n
The status quo<\/strong><\/p>\n Moody\u2019s investment grade of South Africa is at Baa2 for local and foreign currencies with a negative outlook. The rating is two notches above sub-investment (also referred to as junk) grade.<\/p>\n S&P has South Africa\u2019s credit rating assigned as BBB+ (local currency) and BBB- (foreign currency) \u2013 one level above junk status with a negative outlook.<\/p>\n Fitch rates South Africa at BBB (local currency) and BBB- (foreign currency) \u2013 also one notch above sub-investment grade, but with a stable outlook.<\/p>\n Four criteria<\/strong><\/p>\n Of the three ratings agencies, S&P has South Africa at the lowest credit rating and if S&P is to retain South Africa\u2019s credit rating it has to meet four requirements:<\/p>\n Minimum wage<\/strong><\/p>\n Schoeman expects ratings agencies to be \u201csomewhat indifferent\u201d about the level at which South Africa\u2019s national minimum wage will eventually be set.<\/p>\n Deputy President Cyril Ramaphosa on Sunday announced that the proposed minimum wage level will be R3 500 per month. This is however not final as the four constituencies of the National Economic Development and Labour Council (Nedlac) have different views \u2013 labour wants R4 000 to R4 500; business wants R1 800 to R2 000 and government was willing to settle at R2 500.<\/p>\n \u201cAs such, R3 500 doesn\u2019t really seem to appease anyone,\u201d Schoeman says.<\/p>\n She cautions, though, that if a national minimum wage of R3 500 would lead to substantial job losses next year, rating agencies could hold South Africa accountable at the time of the 2017 reviews.<\/p>\n If not now, then when?<\/strong><\/p>\n Citi expects S&P to keep South Africa\u2019s foreign currency rating unchanged on 2 December at BBB-. \u201cHowever, we do expect the agency to send a warning signal in the form of a local currency downgrade to BBB (from BBB+ currently).<\/p>\n \u201cWe don\u2019t expect much reaction from financial markets to a local currency downgrade, given that this rating would still be two notches above sub-investment grade,\u201d Schoeman says.<\/p>\n A foreign currency rating downgrade in 2017, however, seems inevitable, as further reforms in the mining sector and state-owned enterprises would be necessary to ultimately avoid it.<\/p>\n Schoeman says although there are sections in government that seem keen on such reforms, it will be difficult to achieve it within the next 12 months. \u201cNot only do such reforms take a long time to progress through the various channels of government and other bodies, such as labour and business, but this would need to progress during the 2017 ANC electoral cycle (when the ANC elects new national leaders) which we suspect would be distracting to policymakers.\u201d<\/p>\n Citi therefore expects there\u2019s a more than 50% chance that S&P could downgrade South Africa\u2019s foreign currency rating to BB+ in 2017 \u2013 most likely during the June 2017 review period.<\/p>\n\n
\n
\n
\n