Standard and Poor’s downgraded South Africa’s local debt by a notch to BBB on last December but kept the country’s sovereign credit rating unchanged by BBB – one level above “junk” status, while saying the economy was still struggling.
According to Reuters, S&P retained its negative outlook on the rating and a cut would take South Africa below investment grade, pushing its bonds out of global indices and preventing institutional investments from buying its debt.
The wire service noted that the rand gained more than 2 percent against the dollar after the rating release, and 90 percent of South Africa’s 2.4 trillion rand ($173 billion) debt is denominated in the local currency.
The S&P statement, issued last December, 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.”
According to Reuters, the Policymakers have been trying to avert a downgrade to “junk” as Africa’s most industrialised economy needs to borrow about 165 billion rand ($12 billion) this fiscal year to help plug its budget deficit.
The Treasury further warned late last year that borrowing costs could double or triple if its ratings fall. Treasury Director General Lungisa Fuzile told Talk Radio 702 after S&P’s decision that growing GDP will require further fiscal consolidation.
TUG-OF-WAR for South Africa’s Economy
According to S&P a tug-of-war in the ruling African National Congress (ANC) could impact the economy negatively.
After the ANC backed scandal-plagued President Jacob Zuma after several officials called for him to resign last year. Since taking office in 2009, Zuma has been plagued by accusations of corruption, which he has repeatedly denied to the public.
A prolonged investigation into Finance Minister Pravin Gordhan this year also rattled financial markets. The state prosecutor dropped fraud charges against Gordhan, executing a U-turn in a case that has drawn accusations of political meddling.
Chief economist at Standard Charted, Razia Khan said the Rand would rally in a knee-jerk fashion briefly, but “the pace of South Africa’s growth remains a key ratings weakness.”
“The important thing is that we won’t be shut out of global bond indices, but what the downgrade of the local currency rating does has sent a strong message to policymakers that a lot still needs to be done to turn around the economy,” said Chief Economist at Nedbank Mohammed Nalla.