Johannesburg - Despite the National Treasury saying at the weekend it was committed to reducing constraints on the ailing South African economy – after Fitch Ratings cut its credit rating and Standard & Poor’s (S&P) changed its outlook to negative from stable – the move may be too little too late to stop the country’s slide to junk status.
“The government is aware that the country’s economic growth performance needs to be improved in a sustainable manner and has, therefore, made the resolution of the energy challenge an immediate priority,” the Treasury said.
Global markets research firm Nomura said in a note on Friday: “South Africa will not avoid going over the… junk cliff edge given a lack of urgency on structural reforms – the statement from S&P pulls this forward to be a much more immediate risk given its focus on downside growth risks and additional support needed for parastatals. This may well move from a 2018 risk to 2017 or even earlier depending on how the political room to manoeuvre changes.”
It said it did not believe the government understood the need for “timely, urgent prioritisation of consolidation and reform” even after the rating agencies’ actions on Friday.
Shock needed
Nomura said: “Political balancing and rent extraction is just too important for now. A massive domestic risk shock and accompanying market shock will be needed to shift this. That probably will only come with a downgrade to junk. Policymakers will not change beforehand.”
Fitch downgraded South Africa’s sovereign credit rating by one notch to BBB-, the lowest investment grade category, on Friday, citing the slowing economy and rising debt. It gave a stable outlook to the rating.
S&P kept its own rating at BBB- but lowered the outlook to negative from stable, saying this reflected the view that economic growth might be lower than expected.
The third main ratings agency, Moody’s Investors Service, rates South Africa at Baa2 after cutting it from Baa1 in November last year, citing poor prospects for medium-term growth and rising public debt. Its outlook is stable.
S&P said on Friday that it expected gross domestic product (GDP) growth for Africa’s most developed but struggling economy to stay at about 1.6 percent next year, and only rise above 2 percent from 2017 as the electricity supply improved.
Fitch also slashed its 2015 growth forecast to 1.4 percent from 2.1 percent and lowered the projection for next year to 1.7 percent from 2.3 percent.
The Treasury said at the weekend that the government had set out a series of urgent reforms to build a more competitive economy, including investing in infrastructure, reforming the running of state-owned firms and effecting labour market reforms to help avoid protracted strikes.
“Continued revenue growth, strict adherence to the planned expenditure ceiling, as well as the proposed long-term fiscal guideline of linking government spending with long-term growth are projected to result in gross debt stabilising at 49.4 percent of GDP in 2018/19,” the Treasury said.
Investors see more risk in South Africa as the creditworthiness of Africa’s second-largest economy looks set to step closer to junk. The government has little fiscal room to manoeuvre in.
In October, the Treasury cut its economic growth forecast for this year to 1.5 percent from the 2 percent predicted in February, citing domestic energy constraints and the impact of a global slowdown. The economy narrowly avoided a recession in the third quarter, posting 0.7 percent annualised growth after a contraction in the previous three months.
A junk credit rating will not only raise the country’s borrowing costs, but it will also force investment funds that hold South African debt to begin liquidating their holdings since their rules prevent them from holding non-investment grade assets.
Significant risk
“The risk of a junk rating is not insignificant,” Lefika Securities chief economist Colen Garrow said on Friday after the Fitch decision. “There are big question marks over GDP growth and I can’t say we have anything in sight that will elevate GDP growth to significantly higher levels.”
Meanwhile, South African equities tumbled on Friday for the biggest weekly decline since August 2011 before the credit-rating reviews.
The Top40 index fell 2.26 percent to 44 347.44 points, while the all share index fell by the same margin to 49 284.49, the lowest level since September 11.
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