{"id":145575,"date":"2016-12-02T18:47:57","date_gmt":"2016-12-02T16:47:57","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=145575"},"modified":"2016-12-02T19:11:33","modified_gmt":"2016-12-02T17:11:33","slug":"south-africa-avoids-junk-but-its-not-all-good-news","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/business\/145575\/south-africa-avoids-junk-but-its-not-all-good-news\/","title":{"rendered":"South Africa avoids junk status – but it’s not all good news"},"content":{"rendered":"

Standard & Poor\u2019s Global (S&P) has joined other ratings firms Fitch and Moody’s in keeping South Africa’s sovereign debt rating above junk status – however the outlook remains negative.<\/p>\n

The firm announced that it was affirming the country’s rating at BBB-, one notch above junk, but it was downgrading the local currency by one notch to BBB.<\/p>\n

This is significant because 90% of government debt<\/a><\/strong> is carried in local currency, versus only 10% in foreign currency.<\/p>\n

S&P is the last major ratings agency to make a decision on the country’s credit rating for 2016 – and bar any move that would have a massive impact on the economy, it means that we are ‘safe’ until the next review in 2017.<\/p>\n

A rating cut to junk would have meant that the costs for the South African government to borrow would have spiked, taking much-needed resources out of other projects and departments.<\/p>\n

The bottom-line for consumers would have been a likely hike in interest rates –\u00a0thus increasing the monthly cost on things like home loans and vehicle finance repayments\u00a0– and a knock to the rand versus other currencies.<\/p>\n

This would have increase the price that we pay to import foreign good into South Africa, and would have reflect on things like the petrol price (and subsequently other linked services such as transport and freight).<\/p>\n

However, the impact may be over-stated, as it has been shown that many lenders already classify South Africa as junk, and have already priced that into the markets.<\/p>\n

A definite impact would be felt by hedge funds and other investors who are blocked, by policy, from investing in junk countries.<\/p>\n

Analysts and economists say that, should a downgrade happen, it will take years – and significant changes to economic policies – for the country to claw its way back to investment grade.<\/p>\n

At the time of the announcement, the rand traded just below R14 to the dollar, at R13.94, but immediately strengthened to R13.88\u00a0 – 1.5% up on the day.<\/p>\n

As rationale for its decision, S&P said: <\/strong><\/p>\n

“South Africa continues to depend on resident and nonresident purchases of \u00a0rand-denominated local currency debt to finance its fiscal and external \u00a0deficits.<\/p>\n

“Its financing needs have risen beyond our previous expectations, with general government debt set to increase by an average of 4.9% of GDP \u00a0over 2016-2018, to reach gross debt of 54% of GDP in 2019. The proportion \u00a0of rand in global foreign exchange turnover has also declined to just \u00a0below 1% on average over the past three years.<\/p>\n

“We also believe political events have distracted from growth-enhancing reforms, while low GDP growth continues to affect South Africa\u2019s economic \u00a0and fiscal performance and overall debt stock.<\/p>\n

“We are therefore lowering our long-term local currency rating on South \u00a0Africa to ‘BBB’. We are affirming all other ratings.<\/p>\n

“The negative outlook reflects the potentially adverse consequences of \u00a0persistently low GDP growth for the public balance sheet.”<\/p><\/blockquote>\n

Political tensions once again featured prominently, with the ratings firm highlighting the many scandals that have rocked the nation over the past 12 months – starting with former finance minister Nhlanhla Nene being fired around the same time last year.<\/p>\n

“Political tensions are still high,” the group said, highlighting:<\/p>\n