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SA's negative outlook sign of junk downgrade to follow - S&P

Jan 12 2017 12:16
Lameez Omarjee

Johannesburg – More credit downgrades by Standard and Poor’s (S&P) are likely in 2017, and South Africa is in the firing line.

According to analysts, S&P is likely to downgrade South Africa’s sovereign credit rating to junk status by mid-2017.

In its last update at the end of 2016, S&P kept South Africa’s sovereign credit rating one notch above junk at BBB- with a negative outlook.

The rating agency said low gross domestic product growth contributed to the negative outlook, and that the country’s gross debt is expected to rise to 54% by 2019 due to increasing financing needs.

READ: Junk breather for SA, but S&P lowers local currency rating

According to S&P’s Global Sovereign Rating Trends 2017 report an outlook, whether positive or negative, indicates a one in three chance of a rating action being taken in that direction.

Nomura emerging markets economist Peter Attard Montalto previously stated that the S&P downgrade may be accompanied by a downgrade by Moody’s; the current rating is two notches above junk at Baa2 with a negative outlook.

Fitch is likely to downgrade in December 2017; its current rating is BBB- with a negative outlook.

Nomura believes it would be difficult for South Africa to generate positive per capita income growth, due to the political landscape and lack of reforms.

ALSO READ: ALERT: South Africa is on Moody's watch list

Momentum Investments (MMI) analyst Sanisha Packirisamy shared similar views in the group’s economic outlook report for 2017. MMI is of the view that there is a “strong chance” S&P may downgrade South Africa to sub-investment grade by June 2017, according to the report.

Treasury previously indicated that a sub-investment grade status could translate into higher interest payments, a weaker rand, a higher cost of living, reduced fiscal space and lower confidence. This will result in low investment and poor job creation.

ALSO READ: S&P may downgrade SA by mid 2017- analyst

It is also possible that Fitch is likely to maintain its negative outlook, and there is a “high probability” that Moody’s could downgrade the rating by one notch from Baa2, stated Packirisamy.

Economist Dawie Roodt added that the downgrade is likely to happen, but he is optimistic that S&P would make the decision in the second half of the year.  

Three issues will determine SA junk decision

He explained that there are three main issues determining South Africa’s fate. One is the fiscal matrix, which is not good. “State debt levels are at record high levels and they will continue to rise,” he said.

The second factor is political stability, which is not necessarily negative but still risky. “Things could go either way,” Roodt explained, listing ANC succession fights as an example.

The third factor is weak economic growth. “This may surprise on the upside and be better than expected, but still (be) weak.” Depending on what happens, economic growth could be 1% provided that there is no political infighting or rand weakening.

Improvement in the agriculture sector alone, given rains following the drought, could add 1% growth to GDP. “Pretty much the drought or good rains stand between (SA and) a downgrade.”

He added that markets have already priced in the downgrade, and that it would not have a big bearing on the exchange rate currency. 

For the first time since early 2008, the number of negative outlooks assigned by S&P in 2016 outnumbered the positive ones. “On December 31, 2016, the 30 negative outlooks outnumbered seven positive outlooks by a ratio of 4:1,” the report stated.

“This outlook distribution suggests that negative rating actions are likely to continue to outnumber positive actions over the coming 12 months.”

This is in line with analysts’ expectations.

Six out of seven rated African countries have been assigned a negative outlook.

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