Johannesburg – Given the positive turn of events since June, ratings agency Standard and Poor’s (S&P) is less likely to downgrade the country’s sovereign rating but the local currency rating may be downgraded.
This is according to Old Mutual Investment Group chief economist Rian le Roux, who was speaking at a media briefing on the economic outlook for 2017.
S&P will announce its latest decision on South Africa’s credit rating on Friday, December 2. The sovereign rating is currently at BBB-, with a negative outlook. This is one notch above junk status.
The local credit rating is currently at BBB+. Last week, ratings agencies Moody’s and Fitch kept South Africa’s sovereign credit rating, with Fitch downgrading its outlook from stable to negative.
“A downgrade in local currency should not be an issue,” said le Roux.
For there to be a “fall out” in the global bond index, it will require two institutions to have the local currency in negative, or below sub-investment grade.
This means there should be a real risk the country cant repay it's local debt, which is not the case. The downgrade in local currency rating is widely expected, but the impact will be very little, he added.
Peter Brooke, head of MacroSolutions boutique, added that a downgrade in local currency has been priced in.
“I do not think we should fear that too much,” said Brooke.
Decent returns can be seen for bonds.
READ: Possible credit downgrade already priced in markets
Le Roux explained there have been a number of positive developments since the ratings agencies' decisions to hold South Africa’s rating in June.
These include politics taking a turn for the better, with civil society placing increasing pressure on President Jacob Zuma and charges against Finance Minister Pravin Gordhan being dropped.
“Fiscal consolidation looks better,” said le Roux.
The finance minister has also made a “solid commitment” to raise taxes in the budget. Ratings agencies were concerned about fiscal flexibility, he said.
Further the “wave of strikes”, which were anticipated in the second half of the year (2016), did not materialise.
The macro-economy has taken a turn for the better, with growth rebounding after the first quarter shock contraction. The external or global environment is improving, inflation is peaking and the current account deficit is narrowing, he explained.
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There are also signs that government is taking reforms in state-owned enterprises (SOEs) seriously. This can be seen with the appointment of a new board for SAA. Le Roux said that it remains to be seen if the progress made is enough to convince ratings agencies.
Le Roux said that S&P will be making institutional assessments, which is “code” for political stability. Currently the assessment is neutral but if there are developments this may be downgraded to negative, he said. A downgrade in this assessment may result in a sovereign downgrade.
If S&P decides not to downgrade South Africa’s credit rating, and if the economy improves given a better global economy, then the country can maintain its investment rating, he said.
But Brooke added that if there is no downgrade, the country will still remain on “watch”.
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