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Fitch downgrade steps up urgency to clear junk hurdle – Treasury

Cape Town – Fitch Ratings’ downgrade of South Africa’s local-currency debt rating is a timely reminder of the risks of a downgrade that lie ahead.

That’s the message from National Treasury on Tuesday, which was reacting to Fitch's announcement on Monday evening.

The agency on Monday aligned South Africa’s long-term local currency rating to the long-term foreign currency rating at ‘BBB-’ with a stable outlook. In effect, it dropped it one level to bring it into line with the nation’s foreign-currency rating.

“Although the action represents an alignment, it also serves as a timely reminder of the risks of a downgrade that lie ahead and the urgency of actions required to reinvigorate the economy,” Treasury said in a statement.

“We must persist with, and redouble our efforts to work together – government, business and labour – to improve our growth prospects and to create more business and work opportunities.

“The National Development Plan and the 9-point plan already identified some of the reform measures that, if we continue to implement diligently, will alter our fortunes in the period ahead.”

Junk status narrative returns

“Whilst a change on technical criteria to the local ratings for South Africa, this does bring the narrative around local ratings entering sub-investment grade onto the table once again,” Peter Attard Montalto, Africa economist at Nomura in London, told Bloomberg.

“It means a widely-expected downgrade of the foreign rating would also bring the local rating into junk.”

Fitch Ratings recently updated its Sovereign Rating Criteria, which is the methodology it uses to rate all sovereigns.

Following the publication of the updated methodology, the agency then held a Sovereign Portfolio Review Committee of all its existing sovereign ratings on Tuesday 19 July 2016.

“The review was aimed at, amongst other things, assessing the relationship between existing rating of long-term local and foreign currency debt in line with the guidelines in the updated criteria,” said Treasury.

“The revised guidelines by the agency reflect their assessment that the credit risk profile of sovereign local and foreign currency debt should be closely aligned,” said Treasury.

The news did not have much effect on the rand, which strengthened 0.5% to R14.29/$ by 07:50 on Tuesday, ending two days of declines. By 09:50, the rand was lower at R14.35/$.

RMB analyst Isaah Mhlanga said on Monday that the rand is currently range-bound between R14.20 and R14.40 to the dollar, ahead of the US Federal Reserve announcement on Wednesday, which could affect its levels.

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