South Africa dealt another ratings blow

S&P has revised its outlook on South Africa to negative but stopped short of lowering its rating – just two weeks after Moody’s also lowered its ratings outlook to negative. Moody’s Investors Service changed the outlook on its rating to negative two weeks ago, after finance minister Tito Mboweni described a rapidly deteriorating fiscal outlook due to billions of dollars in bailouts for cash-strapped power producer Eskom. S&P was the first major ratings company to cut South Africa to junk in 2017, after former President Jacob Zuma replaced the finance minister with a little-known lawmaker in a late-night cabinet shake-up. The country currently has a BB rating. And now it has revised its outlook on South Africa to negative from stable. At the same time, S&P affirmed the BB/B long- and short-term foreign currency sovereign credit ratings and the BB+/B long- and short-term local currency sovereign credit ratings. The transfer and convertibility assessment is BBB-. S&P said: “The negative outlook indicates that South Africa's debt metrics are rapidly worsening as a result of the country's low GDP growth and high fiscal deficits. We could lower the ratings if we were to observe continued fiscal deterioration, for example, due to higher pressure on spending, rising interest costs, or the crystallisation of contingent liabilities related to state-owned enterprises, especially Eskom. “We could also lower the ratings if economic performance weakened further or if external funding pressures were to mount,” it warned. Added to that, S&P said a ratings downgrade could follow if the rule of law, property rights, or enforcement of contracts were to weaken significantly, undermining the investment and economic outlook – something it sees as unlikely. The rating agency said: “Our ratings on South Africa are constrained by low GDP per capita; the weak pace of economic growth, particularly on a per capita basis; its large and rising government debt burden; and sizeable contingent liabilities, primarily tied to the energy utility, Eskom. “The ratings are supported by the country's monetary flexibility, well capitalised and regulated financial sector, and deep capital markets. South Africa also has moderate external debt, in particular low levels of external debt denominated in foreign currency.” S&P concluded: “Once again, South Africa's economic performance has disappointed, depressed by low investment, power shortages, dry weather and limited reform momentum. “We expect growth for this year to come in at 0.6%, down from our expectation of 1% in May. Unemployment is at a 16-year high of 29%. South Africa's recent poor macroeconomic performance has caused a material deterioration in the fiscal outlook and hit tax revenue generation. South Africa now faces a two-pronged challenge: to reinstate its fiscal credibility while simultaneously restoring economic growth.” It acknowledges that the government has started to enact important reforms aimed at restoring the credibility of South Africa's weakened institutions; for example, the reinvigoration of the National Prosecuting Authority and the South African Revenue Service. However, land expropriation remains an issue for some investors. S&P said “We expect land and property expropriation to move slowly. Deals will be subject to the courts' scrutiny and the rule of law, and the enforcement of contracts should remain in place. “Our view reflects our consideration of the checks and balances embedded within South Africa's institutional framework, which includes a constitutionally independent judiciary. However, South Africa still faces significant unaddressed challenges related to high levels of poverty, unemployment and economic inequality.”

South Africa dealt another ratings blow

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