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S&P's ratings decision a partial victory, says Montalto

Cape Town - S&P’s decision to affirm South Africa’s sovereign credit rating at one notch above sub-investment grade is a “partial victory” for National Treasury, said emerging market economist Peter Attard Montalto of Nomura. 

“National Treasury has pushed continually and hard on the rating agencies through every means available to them to avoid a downgrade to junk - dangling reforms in front of them, creating a positive mood music with business and labour.”

Ultimately, the saving graces for S&P, Montalto said, were the stabilisation in the strike situation and of energy supply together with a firm short run commitment on the fiscal front. “This all led to S&P giving South Africa the benefit of the doubt.”

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

He cautioned however that “this can't continue forever” and the downgrade of the local currency rating is a crystallised view of increasing risk in the eyes of S&P from politics, poor growth outlook and the “piecemeal” implementation of reforms. 

S&P also noted the long run fiscal and debt outlook is deteriorating faster than they had previous presumed. 

“They remain very worried about the risks of increasing political noise and contestation in 2017,” Montalto said. “They said specifically there was a risk of an alteration in the direction of policy, which might be a coded reference to a cabinet reshuffle.” 

Read: Rand rallies as SA dodges junk bullet

Overall the key parts of the negative outlook revolve around low economic growth that is a “drag” on the public balance sheet, Montalto said. As such S&P highlights reasons to downgrade South Africa should there be an increase in contingent liabilities and if net debt climbs higher than expected. 

In addition, S&P specifically highlights that a further narrowing of the gap between the foreign and local currency ratings is possible if they see a bigger reduction in fiscal flexibility.

A downgrade of the foreign currency rating didn't happen, but S&P is waiting for more slippage before they take this decision. 

FULL S&P STATEMENT: SA survives junk hurdle

“That may well come after the budget,” Montalto said, but again it will always be marginal, provided that Finance Minister Pravin Gordhan doesn’t get ousted from his position. 

“As such we think ratings risks remains high in 2017 for S&P and Moody's if net debt continues to creep higher and with what we think will be further downgrades to growth expectations and a flattening of the growth recovery outlook.”

Montalto says a rally in markets is possible following S&P’s decision.

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