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    Home » News » Economic recovery key to avoiding junk

    Economic recovery key to avoiding junk

    By Agency Staff5 December 2016
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    South-African-flag

    South Africa’s chances of repeating its escape from a junk credit rating in 2017 are in the balance as focus intensifies on tepid economic growth and simmering political tensions.

    S&P Global Ratings kept its assessment of the nation’s foreign-currency debt at BBB-, one level above non-investment grade, with a negative outlook on 2 December, while cutting the local-currency rating by a step to BBB.

    S&P’s affirmation follows that of Fitch Ratings a week earlier, which also left South Africa’s foreign-currency assessment at one level above junk, while Moody’s Investors Service’s rating is one step higher.

    The reprieve may be short-lived if the government doesn’t take steps to accelerate economic growth, according to Piotr Matys, an emerging-market currency strategist at Rabobank in London.

    “Comments from S&P imply that it is absolutely crucial for South Africa to accelerate the pace of implementing structural reforms to avoid a downgrade in the coming months,” Matys said in an e-mailed response to questions.

    Prolonged political “infighting may delay an implementation of reforms, which would increase the odds that S&P may downgrade South Africa to junk”, he said.

    Political turmoil in South Africa, including an investigation into finance minister Pravin Gordhan, has overshadowed the state’s efforts to boost investor and business confidence, such as recent proposals to stabilise the labour market.

    The slowest output growth this year since a 2009 recession will complicate Gordhan’s pledge to narrow the budget deficit to 2,5% of GDP by 2020, from a projected 3,4% this year, and to limit government debt.

    S&P said political events have distracted from growth-enhancing reforms and slow output growth continues to affect the nation’s fiscal performance and overall debt levels, and is a ratings weakness. While the government has identified important reforms and supply bottlenecks in the economy, “delivery has been piecemeal”, the company said.

    S&P gave South Africa the benefit of the doubt, Peter Attard Montalto, a London-based economist at Nomura International, in an e-mailed note.

    Pravin Gordhan
    Pravin Gordhan

    “This can’t continue forever and the downgrade of the local-currency rating is a crystallised view of increasing risk in the eyes of S&P” from politics, the poor growth outlook and the slow implementation of reforms, he said.

    Gordhan, 67, has been leading efforts to avoid a downgrade to junk with meetings between the government, business and labour and by talking to foreign investors.

    However, a standoff between him and President Jacob Zuma over control of the treasury and state-owned companies, delays in passing new mining and anti-money laundering laws and a failed attempt by senior ANC officials last week to oust Zuma have fueled perceptions of political turmoil and policy uncertainty.

    Short celebration

    The national treasury recognises what needs to be done and is committed to implement the reforms needed, it said in a statement after S&P’s announcement.

    “We can celebrate for a few hours, come Monday we must roll up our sleeves and get down to work and do what is necessary to make sure that come six months’ time we will not be panicking,” Lungisa Fuzile, the head of the treasury, said by phone on 2 December.

    The economy will probably expand 0,4% this year and 1,2% in 2017, according to the central bank. That’s not enough to reduce the nation’s 27% unemployment rate, governor Lesetja Kganyago said on 30 November.

    “The risk is still significant that we may see sub-investment grade on the foreign currency sometime during next year,” Ettienne le Roux, chief economist at Rand Merchant Bank in Johannesburg, said by phone. “The key issue is the lack of GDP growth.”  — (c) 2016 Bloomberg LP



    Jacob Zuma Pravin Gordhan
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