{"id":176567,"date":"2017-05-25T14:53:56","date_gmt":"2017-05-25T12:53:56","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=176567"},"modified":"2017-05-25T14:53:56","modified_gmt":"2017-05-25T12:53:56","slug":"what-will-happen-if-south-africa-is-hit-with-more-downgrades","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/business-opinion\/176567\/what-will-happen-if-south-africa-is-hit-with-more-downgrades\/","title":{"rendered":"What will happen if South Africa is hit with more downgrades"},"content":{"rendered":"

Agathe Fonkam, researcher at think-tank, the Helen Suzman Foundation, provides a summary of the most recent decisions taken by the credit ratings agencies on South Africa’s credit rating following the cabinet reshuffle in March this year, and<\/em>\u00a0evaluates the economic implications of a further downgrade.<\/em><\/p>\n

The recent cabinet reshuffle has raised serious concerns related to the level of risks associated with investment confidence and political stability. This led to the decisions by the three major international credit ratings agencies, Standard & Poor\u2019s (S&P), Moody\u2019s and Fitch, to review the credit ratings of South Africa.<\/p>\n

S&P and Fitch downgraded the country\u2019s foreign currency rating to non-investment grade (commonly referred to as \u201cjunk status\u201d). Moody\u2019s has put South Africa\u2019s sovereign rating on review for a downgrade. This brief summarises the most recent decisions taken by the three ratings agencies and comments on some of the implications.<\/p>\n

Overview<\/strong><\/p>\n

Both quantitative and qualitative factors are taken into account in determining sovereign credit ratings.<\/p>\n

The overriding criteria which typically govern a rating are the following general considerations: the expected economic growth of an economy, its resilience to potential shocks, the quality and predictability of a government\u2019s decision-making, whether the state\u2019s debt position is manageable and whether the state is able to balance its expenses as against its revenue.<\/p>\n

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\n\u201cInvestment-grade\u201d is a term broadly used to describe governments with relatively high levels of creditworthiness and credit quality.\u00a0 In contrast, the term \u201cspeculative\u201d or \u201cnon-investment grade\u201d (or \u201cjunk status\u201d) generally refers to governments which may currently have the ability to repay but face significant uncertainties that could affect credit risk.<\/p>\n

Since the respective ratings by the agencies may seem somewhat confusing at first sight (as they use different symbols to denote the different levels) the following table provides a simplified overview of the current status , reflecting the long-term foreign and local currency ratings (the same levels are reflected in the respective short-term ratings).<\/p>\n

Standard and Poor\u2019s<\/strong><\/p>\n

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On 3 April 2017, S&P announced its decision to lower the long-term foreign currency sovereign credit of South Africa from BBB- (the lowest investment grade) to BB+ (the highest non-investment grade) and the long-term local currency rating from BBB to BBB- (therefore still in investment grade, but on the lowest level). A negative outlook was assigned to all long-term ratings.<\/p>\n

S&P\u2019s rating action reflects the view that the recent cabinet reshuffle has put policy continuity at risk and has increased the likelihood that economic growth and fiscal outcomes could be negatively affected. \u00a0It believes that the contingent liabilities of public enterprises, especially in the energy sector will rise. Rising political tensions could delay structural reforms and reduce investor confidence.<\/p>\n

This could lead to currency depreciation and an increase in real interest rates. The current account deficit is expected to average close to 4% of GDP in 2017-2020 and inflation is expected to fall below 6% this year and to remain within the inflation target of 3%-6% over the next three years.<\/p>\n

The negative outlook is an indication that political risks will remain elevated, and fiscal and economic outcomes are likely to be negatively affected as a result of policy shifts.<\/p>\n

Moody\u2019s<\/strong><\/p>\n

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On 3 April, Moody\u2019s announced that it had placed the long-term ratings of South Africa on review for a downgrade.<\/p>\n

Although it has acknowledged that changes in a ministerial cabinet do not automatically lead to material changes in a country\u2019s credit profile, Moody\u2019s decision reflects a view that the cabinet reshuffle raises questions on the prospects for ongoing reforms, the underlying strength of South Africa’s institutional framework, and the fragile recovery in the country’s economic and fiscal position. During the review, Moody\u2019s intends to assess, inter alia:<\/p>\n