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Junk call: SA will know in June

Apr 10 2016 18:14

Johannesburg - South Africa will know in June whether it has survived an almost certain downgrade to junk status when ratings agency Standard & Poor's makes its judgment on the state of the SA economy.

Moody's Investor Service, another ratings agency that visited SA in March following an investor roadshow by Finance Pravin Gordhan to appease the international investor community, is also expected to give its verdict on the SA economy in June.

Moody's, which placed South Africa’s credit rating on review for a downgrade on March 8, typically concludes reviews within 90 days. This means that the agency could issue its review report by June 8 or earlier, Fin24's sister publication City Press reported on Sunday.

S&P associate director Gardner Rusike confirmed this week during an investor conference in Johannesburg that his agency was set to review and issue its latest report on South Africa in June.

Rusike cited political upheavals in South Africa as a real risk to the country's sovereign credit rating.

"Recently we have seen focus shift to political issues in parliament and the Constitutional Court, and this could divert government's attention from issues around policy implementation," Rusike said.

In addition to this, economic indicators do not paint a better picture. Positive GDP data of 0.6% for Q4 2015 was offset by a widening current account deficit despite a weaker rand. Consumer price inflation also printed at 7% for the year to February 2016, much higher than expected.

Stanlib chief economist Kevin Lings told Fin24 last month a ripple effect of the current upheavals, means more volatility in the rand, which could increase the prospect of another interest rate hike by the Reserve Bank to stabilise currency markets.

He cautioned that the cost of borrowing would go up, even without the revision of a credit rating “because the markets don’t wait for that”.

The political instability would also erode business confidence, because business leaders want assurance that they can properly engage with a particular ministry, and that sound and sensible policies are in place and consistently applied.

Christie Viljoen, economist at KPMG South Africa, said the current state of affairs shows that “anything can happen” in South Africa’s politics. “We’ve seen it with Nhlanhla Nene’s firing and with the Gupta revelations,” he told Fin24.

He believes these incidents would make it easier for Standard & Poor's and Fitch to downgrade South Africa to junk status. “All these things reaffirmed the concerns they had about South Africa.”

City Press quoted Rusike as saying the government could boost growth through two "easy" ways: By moving on changing labour law to avoid a repeat of an extended wage strike, as happened in the platinum sector, which would hurt growth – and by improving electricity supply.

S&P and Fitch rate South Africa at BBB-, one notch above sub-investment grade or “junk” status with a negative outlook.

Moody's, which currently rates South Africa two notches above sub-investment grade for foreign currency debt, in March placed the Baa2 bond and issuer ratings of the SA government on review for downgrade.

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