Johannesburg - Whether South Africa sinks or swims is now in the sole hands of S&P Global Ratings after the other two main ratings agencies spared South Africa from being relegated to “junk” status on Friday.
S&P is scheduled to release its review on December 2 and is arguably the most significant agency to watch at present.
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It has the worst rating assigned to South African credit in foreign currency of BBB-, with a negative outlook. This is one level above “junk”.
To avoid the downgrade S&P will need to be satisfied with South Africa’s political stability, particularly within the finance ministry, outlook for growth and fiscal path set out in the medium-term budget.
S&P on Friday downgraded Eskom’s credit rating a further notch into sub-investment, raising concerns the country’s sovereign rating would also be dragged into “junk” status.
Some analysts say the move to cut the utility’s rating could be a precursor to a downgrade of the sovereign.
“Seems like a major move ahead of next week. Maybe it increases the chances of a downgrade end next week, given the interdependence of parastatal ratings with the sovereign,” said London-based Africa analyst at Nomura, Peter Attard Montalto.
On Friday, South Africa dodged a bullet from Moody’s and Fitch with the former keeping South Africa’s sovereign rating unchanged at Baa2, two levels above subinvestment grade, with a negative outlook.
Fitch affirmed South Africa’s investment-grade credit rating at one notch above “junk”, but changed its outlook.
It said although business confidence was depressed and investment was contracting, South Africa’s economy might have started to recover.
But it said in-fighting in the ANC was likely to continue at least until the party’s electoral conference in December 2017.
Fitch said that although business confidence was depressed and investment was contracting, South Africa’s economy might have started to recover.
In its review, Moody’s noted the strength of South African institutions that support the investment grade rating, citing the National Prosecuting Authority dropping charges against the finance minister and the public protector’s State of Capture report as positive developments.
But the agency also lists a number of concerns, including political infighting, low growth and unemployment, which it believes pose the greatest risks to the country, which is expected to see economic growth of around 0.5 percent this year.
South Africa has been trying to avert a sovereign rating downgrade to “junk” status that would raise borrowing costs and deter investment.
It needs to borrow about R165 billion this fiscal year to help plug its budget deficit, and the National Treasury warned this month that its borrowing costs could double or triple if it falls into sub-investment grade.
Moody’s expressed concern about the debt burden, which has reached 49.4 percent in 2015, nearly double the 26.5 percent in 2008.
“This higher debt burden has lifted interest costs, with the headline deficit falling at a slower rate than the primary debt deficit as interest payments mount.”
The Treasury said it welcomed the two reviews and added the economy was showing resilience, supported by strong and independent institutions.
“Efforts made by South Africa to keep the country on an investment grade have paid off. The government, business, civil society, labour and politicians continue to work hard to build a foundation for faster growth.”
South Africa’s biggest business organisations, the CEO Initiative, Business Leadership South Africa and Business Unity South Africa said they saw the announcements by Moody’s and Fitch as a beginning rather than an end of a process.
Dan Matjila, the chief executive of the Public Investment Corporation, which has R1.8 trillion assets under management, said: “All we need to do now is to go to work to deliver on our promises and improve our credit rating.”
Old Mutual Investment Group chief economist Rian le Roux said the past six months had seen little in terms of policy reforms and this kept the risk of an actual downgrade by S&P alive.
“The recent announcement on the suggested minimum wage does create a bit more certainty about the issue, despite strong opposing views and further negotiations still to be conducted.”
He said there had been indications that announcements could soon be made on the mining charter and labour reforms, creating some more policy certainty, but the timing was uncertain and it was obviously still uncertain as to whether the nature of these reforms will satisfy S&P.
BUSINESS REPORT