Johannesburg - Standard & Poor's downgraded South Africa's local debt by one notch to BBB on Friday but kept the country's sovereign credit rating unchanged at BBB-, one level above "junk" status, while saying the economy was still struggling.
This is according to Reuters, which is reporting that S&P retained its negative outlook on the sovereign unchanged.
The wire service notes the rand gained more than 1.5 percent against the dollar after the ratings release.
About 90 percent of South Africa's R2.4 trillion ($173 billion) debt is held in local currency, and the cut could see the country fall out of global bond indices, preventing institutional investors from buying its debt.
The S&P statement, issued late on Friday, says it has lowered the long-term local currency ratings on South Africa because its fiscal financing needs are increasing beyond our previous base-case expectations, while the proportion of rand turnover in the global foreign exchange market has declined over the last three years.
"South Africa continues to depend on resident and non-resident purchases of rand-denominated local currency debt to finance its fiscal and external deficits. Its financing needs have increased beyond our previous base case, with general government debt set to increase by an average of 4.9 percent of gross domestic product over 2016-2018, compared to our previous estimate of 4.1 percent for the same period,"
The international ratings agency adds the proportion of rand in global foreign exchange turnover has also declined to just below 1 percent on average over the past three years. "More broadly, we believe political events have distracted from growth-enhancing reforms and persistently low GDP growth continues to dampen per capital wealth levels and the country's fiscal performance."
S&P adds the ratings reflect its view of the country's large and active local currency fixed-income market, as well as the authorities' commitment to gradual fiscal consolidation. "We also note that South Africa's institutions, such as the judiciary, remain strong while the South Africa Reserve Bank (SARB) maintains an independent monetary policy."
The ratings agency adds "South Africa’s pace of economic growth remains a ratings weakness. It continues to be negative on a per capita GDP basis. While the government has identified important reforms and supply bottlenecks in South Africa’s highly concentrated economy, delivery has been piecemeal, in our opinion. The country’s longstanding skills shortage and adverse terms of trade also explain poor growth outcomes, as does the corporate sector’s current preference to delay private investment, despite high margins and large cash positions."
Fitch Ratings on November 25 changed the outlook on its BBB- rating, which is one level above junk, to negative from stable and warned that continued political instability could result in a downgrade. Later the same day, Moody’s Investors Service, which rates South Africa’s debt at the second-lowest investment grade level, with a negative outlook, said in a credit opinion political infighting that generates policy uncertainty and impedes structural reforms could lead to a cut.
S&P has marginally revised its real GDP growth assumptions for South Africa to 0.5 percent for 2016 and 1.4 percent for 2017. Last June, it forecast 0.6 percent for 2016 and 1.5 percent for 2017. "Our revised projections are contingent on global growth, and, in particular, South Africa’s terms of trade. The economy remains directly and indirectly linked to demand for commodities, especially from China."
It estimates that real GDP per capita will stand at $5 300 in 2017.