S&P celebration is over, time to roll up sleeves - Fuzile

Johannesburg - “We can celebrate for a few hours, come Monday we must roll up our sleeves and get down to work and do what is necessary to make sure that come six months’ time we will not be panicking,” Lungisa Fuzile, the head of the Treasury, said in response to South Africa escaping junk status in 2016.

He was responding on Friday after S&P Global Ratings kept its assessment of the nation’s foreign-currency debt at BBB-, one level above non-investment grade, with a negative outlook, while cutting the local-currency rating by a step to BBB. S&P’s affirmation follows that of Fitch a week earlier, which also left South Africa’s foreign-currency assessment at one level above junk, while Moody’s Investors Service’s rating is one step higher.

The National Treasury said it recognises what needs to be done and is committed to implement the reforms needed, it said in a statement after S&P’s announcement.

However, South Africa’s chances of repeating its escape from a junk credit rating in 2017 are in the balance as focus intensifies on tepid economic growth and simmering political tensions.

The reprieve may be short-lived if the government doesn’t take steps to accelerate economic growth, according to Piotr Matys, an emerging-market currency strategist at Rabobank in London.

“Comments from S&P imply that it is absolutely crucial for South Africa to accelerate the pace of implementing structural reforms to avoid a downgrade in the coming months,” Matys said in an e-mailed response to questions. Prolonged political “infighting may delay an implementation of reforms, which would increase the odds that S&P may downgrade South Africa to junk,” he said.

Political turmoil in Africa’s most-industrialized economy, including an investigation into Finance Minister Pravin Gordhan, has overshadowed the state’s efforts to boost investor and business confidence, such as recent proposals to stabilize the labor market. The slowest output growth this year since a 2009 recession will complicate Gordhan’s pledge to narrow the budget deficit to 2.5 percent of gross domestic product by 2020, from a projected 3.4 percent this year, and to limit government debt.

‘Piecemeal delivery’

S&P said political events have distracted from growth-enhancing reforms and slow output growth continues to affect the nation’s fiscal performance and overall debt levels, and is a ratings weakness. While the government has identified important reforms and supply bottlenecks in the economy, “delivery has been piecemeal,” the company said.

S&P gave South Africa the benefit of the doubt, Nomura emerging market economist Peter Attard Montalto said, in an e-mailed note.

“This can’t continue forever and the downgrade of the local-currency rating is a crystallized view of increasing risk in the eyes of S&P” from politics, the poor growth outlook and the slow implementation of reforms, he said.

Gordhan  has been leading efforts to avoid a downgrade to junk with meetings between the government, business and labour and by talking to foreign investors. However, a standoff between him and President Jacob Zuma over control of the Treasury and state-owned companies, delays in passing new mining and anti-money laundering laws and a failed attempt by senior African National Congress officials last week to oust Zuma have fuelled perceptions of political turmoil and policy uncertainty.

The economy will probably expand 0.4% this year and 1.2% in 2017, according to the central bank. That’s not enough to reduce the nation’s 27% unemployment rate, Governor Lesetja Kganyago said on November 30.

“The risk is still significant that we may see sub-investment grade on the foreign currency sometime during next year,” Ettienne le Roux, chief economist at Rand Merchant Bank in Johannesburg, said by phone. “The key issue is the lack of GDP growth.”