Publications
Partners
Johannesburg - Standard & Poor's (S&P) has kept South Africa's long term foreign currency rating at BB+ with a negative outlook.
The local currency rating remains at investment grade at BBB- with a negative outlook.
According to a statement issued by Treasury, the ratings agency is concerned about the low economic growth which poses a risk for fiscal consolidation and rising contingent liabilities.
In April the ratings agency downgraded the foreign currency sovereign rating to BB+ from BBB- with a negative outlook. The local currency was downgraded to BBB and remained investment grade. This came following the Cabinet reshuffle where President Jacob Zuma replaced former Finance Minister Pravin Gordhan with former Home Affairs Minister Malusi Gigaba.
The agency listed policy continuity risk as the reason, given the change in leadership.
Among some of the new concerns of the ratings agency include the country’s ability to reduce economic inequalities in the medium term.
S&P noted the exchange rate appreciation, improving agricultural output, inflation-targeting which helped ease inflation back into the target range and monetary flexibility as a strength.
“The negative outlook on the foreign and local currency ratings reflects our view that political risks will remain elevated this year, which could undermine economic growth and fiscal outcomes more than we currently project,” the agency stated.
Political risk
S&P expects political risks to remain elevated with the run-up to the ANC elective conference later this year. This will distract from economic growth priorities, slow fiscal consolidation and weigh down investor confidence.
“We believe the current political environment could result in the private sector delaying business investment decisions, thereby restraining GDP growth.”
S&P projects growth to rebound to 1% in 2017 and average at 1.5% between 2017 and 2020. The current account deficit is estimated to average 3.4% of GDP due to improved terms of trade, a recovery in commodity prices.
Further the weak economic growth may impact tax revenues. “Overall we see fiscal deficits declining marginally slower than our previous assumptions,” said S&P. Government debt is expected to average at 4.3% of GDP between 2017 and 2020.
S&P added that given 35% of government’s rand denominate debt is held by non-residents it would make financing cots vulnerable to foreign investor sentiment, exchange rate fluctuations, and rises in developed market interest rates. S&P forecasts interest expense to remain at 12% over the medium term.
Rising contingent liabilities
Public sector debt is estimated to be 70% of GDP in 2017, with increased risks from non-financial public enterprises which will require government support.
Overall guarantees are projected to reach R500bn by 2020, or 10% of 2017 GDP. The bulk (R350bn) of this will be required by Eskom. It is estimated Eskom will have used R300bn by 2020. S&P is of the view attempts to improve the financial position of the power utility will fall behind given its governance issues.
READ: Treasury hopeful of positive credit ratings outlook
Bloomberg previously reported that Treasury was optimistic about the credit rating decisions ahead of the announcement.
On Thursday Fitch Ratings affirmed South Africa's long-term foreign- and local-currency issuer default ratings at BB+ with a stable outlook. The agency listed low growth, deteriorating governance at state-owned companies (SOCs) and contingent liabilities.
The ratings agency is of the view that the Cabinet reshuffle will have negative consequences for the South African economy. Fitch explained that it is “likely to undermine governance of SOCs, weaken fiscal consolidation and reduce private sector investment” due to lower business confidence.
ALSO READ: ALERT: Rand dips below R13/$ as Fitch affirms SA rating outlook as stable
In a statement Treasury affirmed that fiscal consolidation is “firmly on track” and that the minister is making the effort to engage with business and labour to fulfill the required outcomes.
SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.
