‘Just one notch left to junk status’Comment on this story
Johannesburg - The downgrade of South Africa’s credit rating by Standard & Poor’s (S&P) and the shift in the country’s outlook from stable to negative by Fitch Ratings mean the National Development Plan (NDP) must be implemented quickly if the country is to avoid slipping down the single notch to junk status, economists say.
As much as the “modest” downgrade was expected, some commentators have warned that the country should not be overly excited by ratings because they were influenced largely by one sphere of economic activity: the five-month platinum strike.
The general agreement among economists is that the downgrade was already factored in and the downgrade was modest. However, the situation implies increased pressure for Finance Minister Nhlanhla Nene to be more aggressive in his policy when it comes to the government budget deficit.
The Reserve Bank and the National Treasury strenuously dispute the probability of a slide into recession by the end of June, much against the thinking of economists who maintain that the economy is on track for another quarter of contraction, giving rise to a recession.
Fitch sees the NDP as a good answer to the issues facing South Africa, which means that President Jacob Zuma’s cabinet must immediately align its ideas, plans and budgets to the NDP, according to Bongani Mbindwane, an economic analyst and the head of the Mbindwane Family Investment Trust.
“Failure to do so this year will lead to another downgrade. Items the like [nuclear power] may have to take a back seat too, as these will strain the already bloating debt to gross domestic product (GDP) ratio,” he said.
On Friday, Fitch affirmed the country’s long-term foreign and local currency issuer default ratings at BBB and BBB+ but revised South Africa’s outlook to negative from stable.
S&P lowered South Africa’s long-term foreign currency credit rating to BBB- from BBB and the long-term local unit rating to BBB+ from A-. S&P revised South Africa’s outlook to stable from negative.
S&P cut South Africa’s GDP growth forecast for 2014 to 1.9 percent from 2.7 percent. This is slightly better than Fitch’s forecast of 1.7 percent
Mbindwane explained that South Africa’s debt to GDP ratio was above 40 percent at present, and lamented that bold steps should be taken to avoid it going beyond the 40 percent threshold in the next five years.
“What bodes well, however, is that only between 8 percent and 9 percent of government debt is denominated in foreign currency. This must be applauded greatly as it implies the rating downgrade does not have deep reach.
“In this instance you will not suddenly get multitudes of lenders calling for their loans or cancelling them,” he said.
Dave Mohr, the chief investment strategist for Old Mutual Wealth, said the issues raised by S&P were flagged in December and widely known, which ensured that short-term market reaction would be muted.
But he stressed the longer-term outlook was of more concern as South Africa was now only one notch above junk status.
“If we do not get growth going and make headway in closing the budget and current account deficits, a further downgrade is likely. This will probably put significant upward pressure on long-term bond yields and downward pressure on the currency as several foreign institutional investors will not be allowed to hold our bonds in terms of their mandates,” he said.
Higher government bond yields would translate into higher borrowing costs for the private sector, potentially weakening growth and setting off a negative spiral.
Gina Schoeman, an economist at Citi Bank, said a positive from Fitch was that governance and the business climate still beat South Africa’s BBB peers. S&P’s move to a stable outlook reflected its belief that the platinum strike would end and its current assessment of the twin deficits was unlikely to deteriorate. - Business Report