SAfrica dodges debt downgrade to ‘junk’: S&P

June 3, 2016
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Finance Minister Pravin Gordhan. Picture/AFP
Finance Minister Pravin Gordhan. Picture/AFP

, JOHANNESBURG, South Africa, May 3 – South Africa on Friday ducked a much-feared downgrade of its debt to “junk” status as the S&P Global-Ratings agency stood by its current ratings.

The agency warned, however, that the outlook for South Africa’s rating remains negative because of weak growth and political tensions.

Overview
  • South Africa has been plagued by political controversy as its growth this year is expected to hit its lowest since the 2008 world economic crisis.
  • The IMF forecasts a meagre 0.6 percent growth, while one of the country's four leading banks, Nedbank, expects 2016 "to be a very weak year, with growth of only 0.2 percent".
  • Africa's most advanced economy has been hit by weak international commodity prices and the economic slowdown in China.

S&P’s currently rates South African longterm debt BBB-, just one notch above junk, a status that prevents many international investors from buying into sovereign bonds.

The government welcomed S&P’s decision to put a downgrade on hold.

“The benefit of this decision is that South Africa is given more time to demonstrate further concrete implementation of reforms that are underway,” the treasury said in a statement.

“The rating outcome demonstrates that South Africans can unite, especially during difficult times, to achieve a common mission.”

South Africa has been plagued by political controversy as its growth this year is expected to hit its lowest since the 2008 world economic crisis.

The International Monetary Fund (IMF) forecasts a meagre 0.6 percent growth, while one of the country’s four leading banks, Nedbank, expects 2016 “to be a very weak year, with growth of only 0.2 percent”.

Africa’s most advanced economy, which grew an average 5.0 percent between 2004 and 2007, has been hit by weak international commodity prices and the economic slowdown in China.

The worst drought in 100 years has also dampened agricultural output and spiked spending on food imports.

But political upheavals, particularly President Jacob Zuma’s sudden sacking of finance minister Nhlanhla Nene in December, have seen the rand weaken sharply against the dollar, fuelling inflation.

Zuma’s tense relations with current Finance Minister, Pravin Gordhan, who is seen as trying to clean up corruption and wasteful expenditure, have also worried investors.

Analysts warn that while South Africa has survived a downgrade, it is not out of the woods, and relegation to sub-investment grade level remains on the cards by December.

“On the growth front the economy is not likely to improve significantly during the next six months and that will be a recipe for a downgrade,” Nedbank economist Isaac Matshego told AFP.

However, averting a downgrade would be “an important confidence-booster, especially for increasingly controversial president Jacob Zuma,” UK-based Manji Cheto of Teneo Intelligence said in a note.

Moody’s rating agency last week maintained South Africa’s status at two notches above junk, while Fitch is expected to release it review next week.

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