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Cape Town - The affirmation of South Africa’s sovereign credit rating is good news, but it should serve as a warning to policymakers, according to analysts.
“I expected that South Africa wouldn’t be downgraded, although it is a pity that the local currency rating dropped one notch to BBB,” Christie Viljoen, an economist at KPMG, told Fin24.
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One of the reasons for the local currency downgrade is the budget deficit as announced in Finance Minister Pravin Gordhan’s medium-term budget policy statement, delivered in October 2016.
“It’s good news that S&P still believes our institutions are strong and they don’t regard the political situation as that negative,” Viljoen said.
However, South Africa is not out of the woods yet. “I don’t think the political environment is going to improve anytime soon, which means a downgrade to junk status is just a matter of time.”
No market movements expected
Jeff Schultz, analyst at the multinational bank BNP Paribas, told Fin24 that S&P’s decision to downgrade South Africa’s local currency rating was “to be expected”.
“But I think it is unlikely that markets will move as a result of this,” he added.
According to Schultz, the decision to lower the local currency rating, however should serve as a warning to policymakers to get their house in order.
“We’ve dodged the bullet this time around, but unless government reforms our mineral sector, the labour market and parastatals, a downgrade could definitely be in store when the next ratings review takes place in June 2017,” Schultz said.
A vindication of efforts by government, labour and business
The CEO initiative, a formation of business people under the leadership of Jabu Mabuza, chairperson of Telkom SA, issued a statement late on Friday, welcoming S&P’s decision to retain South Africa’s sovereign credit rating at its current level.
"This means South Africa’s long-term foreign currency debt is rated as investment grade by all three major rating agencies,” it said.
"As we have stated before, this is a vindication of the efforts by government, labour and business over the past year to negotiate and undertake structural reforms to drive faster, more sustainable and more inclusive economic growth for the benefit of all South Africans."
The formation said the announcement has affirmed investors’ conviction in the South African economy.
“But we see it as a beginning rather than an end of a process. We recognise that a lot of work is still necessary to reach higher levels of growth and we remain firmly committed to the structural reform programme, including initiatives undertaken by the CEO Initiative.”
DA - Treasury, Sarb deserve full credit
The DA’s spokesperson on finance, David Maynier said in a statement his party welcomes the decision by S&P to maintain an investment grade sovereign credit rating for South Africa.
“The fact that S&P has not downgraded its sovereign credit rating to junk status amounts to a second stay of execution for South Africa,” Maynier said. “However, the ratings agency once again raised serious concerns about political dynamics stating that “political events have distracted from growth enhancing reforms in South Africa.”
In the end, contrary to what President Jacob Zuma thinks, it is a “big deal” to avoid junk status, Maynier said. “The Minister of Finance, Pravin Gordhan, together with the team at National Treasury, and the South African Reserve Bank, deserve full credit for their hard work avoiding a sovereign credit ratings downgrade of South Africa.”
