Fitch gives SA some breathing room
Johannesburg - Ratings agency Fitch affirmed South Africa’s investment grade credit rating and maintained its stable outlook yesterday, but warned that political tensions could still derail efforts to boost growth.
Fitch became the third agency, after S&P Global Ratings and Moody’s, to keep its rating unchanged, taking some pressure off President Jacob Zuma before the local elections in August.
Fitch’s announcement should also give policymakers more time to implement reforms and boost the economy, before the next round of reviews in December where a “junk” status loomed if South Africa fails to impress, analysts said.
Fitch said the BBB- rating reflected low gross domestic product (GDP) growth, significant fiscal and external deficits and high debt levels, which were balanced by strong policy institutions, deep local capital markets and a favourable government debt structure.
“The dismissal of two finance ministers in a week in December, and subsequent tensions between the new Finance Minister, Pravin Gordhan, and other parts of the government, have raised questions about the commitment of the government to sustained fiscal consolidation and prudent governance of state-owned enterprises,” Fitch said.
It said the ANC was likely to lose some support in the local elections.
“Fitch’s base case is that the government remains committed to fiscal objectives set out in February’s Budget, but political tensions increase risks to progress on fiscal consolidation and growth-enhancing measures, and raise the chances of policy missteps.”
Ratings agencies have also urged South Africa to take measures to improve the economy and deal with loss-making state-owned enterprises before the next round of reviews in December.
Analysts said although Fitch had given South Africa some breathing space, the agency was still concerned by poor growth.
“And that ultimately will need to change for the better if we are going to see any improvement in South Africa’s rating outlook, and if we are in fact going to avoid a downgrade later this year,” BNP Paribas Cadiz Securities economist Jeffrey Schultz said.
Sanisha Packirisamy, an economist at MMI Investments and Savings, said although political risk did not appear to be out of line with South Africa’s BBB-rated peers, the finance ministry debacle and tensions within the government had alerted Fitch to a rise in political risk since its previous review in December.
Hanns Spangenberg, an analyst at NKC African Economics, said the decision by Fitch not to adjust its outlook on South Africa’s sovereign debt rating to negative was somewhat unexpected, particularly in the context of a deterioration in the country’s economic growth outlook.
“Looking ahead, our baseline view is that South Africa will see a downgrade to so-called ‘junk status’ by at least one international rating agency before the end of the year,” he said.
The National Treasury said yesterday: “Once again, this rating outcome demonstrates that during difficult times, South Africa – government, labour, business and civil society – can work together to achieve a common goal.
“Government is grateful to all social partners for their efforts towards achieving this positive outcome and urges everyone to continue this close working relationship over the challenging period ahead.”
It said the meeting between Zuma and Gordhan and senior government officials this week was an expression of the government’s commitment to accelerate implementation of growth-inducing measures and strengthen cohesion in government.
“Fitch's decision is testament to the fact that despite the structural constraints, South Africa remains an attractive investment destination relative to its peers.”
* With additional reporting by Reuters