Arc launched in 2014, and is an\u00a0association of five ratings agencies from Portugal, India, South Africa, Malaysia and Brazil – including the biggest ratings agency in Africa, Global Credit Ratings (GCR).<\/p>\n
Arc’s ratings align with the ‘big three’ agencies, with BB+ representing “moderate risk”, on par with the first stage of sub-investment (“junk”) grade.<\/p>\n
According to the group, the downgrade is based on the continued deterioration in South Africa, in terms of policy continuity and predictability – one of the main rating drivers that has always supported ARC\u2019s ratings of the country.<\/p>\n
Further, political instability, deterioration of the state-owned enterprises (SOE) situation, and the market\u2019s perception of the country\u2019s creditworthiness also played a role.<\/p>\n
“Also contributing to this downgrade is the repeated failure to meet growth and fiscal targets that characterized the past few years, underperforming peers, in spite of the authorities\u2019 efforts and reflecting the major structural weaknesses that compromise the country\u2019s development,” Arc said.<\/p>\n
The group listed the following 8 constraints currently affecting the South African economy.<\/p>\n
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- Uneven economic development with high poverty and very high and climbing unemployment levels (27.6% in 2Q17);<\/li>\n
- A fast-growing population, coupled with inefficiencies in the economy all exert enormous pressures on public resources;<\/li>\n
- State-owned enterprises sector with severe financial, management and governance problems, that represent a significant pressure on government\u2019s finances and a major source of contingent liabilities;<\/li>\n
- Recent deterioration of political stability and increased policy uncertainty, leading to deterioration of business sentiment and investment contraction;<\/li>\n
- Structural twin deficits that are difficult to extinguish given public spending demands and productivity constraints;<\/li>\n
- Competitiveness and productivity challenges partly stemming from infrastructure shortages in power and transportation;<\/li>\n
- Inflexible labour market characterized by frequent and sometimes extreme bouts of labour unrest;<\/li>\n
- Vulnerability to commodity price swings given importance of commodities to exports and the economy.<\/li>\n<\/ol>\n
South Africa could trigger a ratings upgrade if it\u00a0addresses the fundamental structural problems that would make the economy more competitive – particularly in regarding power sector reform and infrastructure improvement.<\/p>\n
However, a further downgrade could be triggered if the government makes policy changes that are detrimental to the economy, and if the rot in SOEs deteriorates further, Arc said.<\/p>\n
“Financial markets pressures following South Africa\u2019s downgrade into non-investment grade status would also prompt rating attention,” it said.<\/p>\n
Where South Africa stands<\/strong><\/p>\n
Arc’s review of South Africa is in-line with the big three which also put the country at the same rating levels during the course of 2017.<\/p>\n
Currently, Fitch is the only ratings firm that has South Africa in ‘full’ junk, with both local and foreign currency debt in sub-investment grade.<\/p>\n
S&P Global has South Africa’s foreign currency debt in junk, with local currency debt one notch above junk. Moody’s is the most optimistic about South Africa, with both local and foreign currency debt one notch above junk.<\/p>\n
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