Johannesburg - Rating agency Standard & Poor’s (S&P) yesterday slashed its growth prospects for South Africa this year from 1.6 percent to 0.8 percent and warned that slow economic growth was putting pressure on the country’s credit rating.
S&P’s warning comes just months before the agency and Fitch Ratings decide on South Africa’s credit rating. There is speculation that the two agencies may downgrade the country to non-investment grade or “junk status”.
Read: S&P cuts SA growth forecast
S&P and Fitch currently have South Africa’s rating a notch above junk status.
Split ratings
Investec chief economist Annabel Bishop yesterday said: “We continue to believe that the next move from S&P will be a downgrade on the local currency front (currently BBB+, to BBB) not the hard currency one (now BBB-), to bring greater alignment between the two. This could occur at the June review, but does not deliver a sub-investment grade outcome.”
Bishop said South Africa was unlikely to see a sub-investment grade rating from any of the agencies.
“Countries which do not have investment grade ratings have higher borrowing costs, which would complicate South Africa’s fiscal consolidation, should it occur,” she said.
S&P associate director Gardner Rusike said yesterday that slow economic growth was putting pressure on South Africa’s BBB- rating, which was the lowest investment grade. “Steps to address growth issues are moving at a slower pace. If they moved at a faster pace it would help us believe in the medium-term growth potential of the economy,” he said.
The agency painted a grim picture of the country’s growth prospects, charging that a range of adverse global and domestic factors had weakened the macroeconomic outlook.
It said economic growth last year slowed to 1.3 percent, less than the estimated rate of population growth, implying a contraction of output per capita by 0.4 percent.
“The factors that weighed on the growth in 2015 are still in play: Prices for South Africa’s export commodities slumped again between October 2015 and January 2016, with iron ore down by more than 20 percent and platinum by 12 percent,” S&P senior economist Tatiana Lysenko said.
Lysenko said the agency expected most commodity prices to remain depressed, largely due to weaker demand from China, which is South Africa’s biggest export destination.
She said economic growth in South Africa had been on a downward trend since 2011 with feeble economic prospects weakening the sentiment of domestic and foreign investors.
“Already weak confidence took a further blow when a respected finance minister, Nhlanhla Nene, was removed from his position in December. As a result, foreign portfolio flows into South Africa slowed markedly in the third quarter, and turned negative in the fourth quarter. The related currency depreciation, accelerating inflation and higher interest rates in turn are weakening short-term growth prospects,” Lysenko said.
Rusike said state-owned companies and an increase in external imbalances could put further pressure on the country’s credit rating.
Economist Dawie Roodt said he was concerned about the impact of a downgrade. “If we are downgraded, it is going to be painful. Food inflation has been rising,” he said.
But Mothata Lesiba, the chief economist at Investment Solutions, said: “It is interesting that during the first three months of this year, even after ‘nine 12’ or the so called Nenegate, foreigners have purchased South African government (bonds) worth about R17 billion, according to data from the JSE. While there were capital outflows in South African equity markets (about R13bn), which is consistent with a broad-based capital outflow situation in other emerging market countries, inflow into South African bonds is a noteworthy outcome.“
Lesiba said various factors attracted investors to local bonds, including the structure of debt issued by the Treasury and South Africa’s deep and liquid financial markets.
“Of the total stock of debt, the lion’s share issued by the Treasury is in rands (90 percent), while the remainder (10 percent) is allotted in foreign currency. All three rating agencies have a better credit-quality rating associated with the 90 percent of issued debt in local currency,” he said.
* With additional reporting by Bloomberg
BUSINESS REPORT