SA on cusp of junk downgrade - economist

Johannesburg - South Africa is edging closer to a possible junk credit rating after Fitch Ratings' review, cautioned chief economist at Standard Chartered Razia Khan.

Fitch Ratings changed the outlook on its assessment to negative from stable and warned continued political instability could result in a downgrade. The rand weakened by 0.4% in response to the announcement.

The foreign-currency rating and the local-currency rating were kept at BBB-, the lowest investment-grade level, Fitch said in a statement on Friday.

Political risks to the standards of governance and policy-making have increased and will remain high at least until the ruling African National Congress’ leadership election in December next year, Fitch said. Continued political instability that adversely affects standards of governance, the economy or public finances could lead to a downgrade, the company said.

Political turmoil in Africa’s most-industrialised economy, including now-dropped fraud charges against Finance Minister Pravin Gordhan, has overshadowed the state’s efforts to boost investor and business confidence, including recent proposals to stabilise the labour market. The slowest output growth this year since a 2009 recession will complicate Gordhan’s pledge to narrow the budget deficit to 2.5% of gross domestic product by 2020, from a projected 3.4% this year, and to limit government deb t.

Gordhan, 67, has led efforts to stave off a downgrade while wrangling with President Jacob Zuma over the management of state-owned companies and the national tax agency. He was reappointed at the end of last year to the position he held from 2009 until 2014 after Zuma was forced to change his decision to replace former Finance Minister Nhlanhla Nene with a then little-known lawmaker, which sent the rand and bonds plunging.

‘Mixed messages’

“The in-fighting within the ANC and the government is likely to continue over the next year,” Fitch said. “This will distract policymakers and lead to mixed messages that will continue to undermine the investment climate, thereby constraining GDP growth.”

Fitch forecast the economy will expand by 0.5% this year, 1.3% in 2017 and 2.1% in 2018. If GDP growth fails to recover due to economic policy uncertainty or if the government fails to stabilise its debt ratio it could also lead to a downgrade, Fitch said.

“The Fitch decision to revise the outlook on South Africa’s BBB- rating is negative, as it brings South Africa closer to a potential downgrade to sub-investment grade,” Khan, head of Africa macro research, said in an e-mailed note to clients.