S&P downgrades South Africa, confirming junk status

South Africans are watching and waiting to see the reaction and impact on the rand this morning, after ratings agency S&P downgraded the country rating late on Friday, following Fitch’s decision to affirm its ratings and Moody’s placing the country on review for downgrade. Bianca Botes, corporate treasury management at Peregrine Treasury Solutions, said: “All eyes will remain on the local political landscape to determine whether or not Moody's will downgrade South Africa. This comes after S&P downgraded South Africa on Friday evening, while Moody's placed South Africa under downgrade review and indicated that the December conference will set the tone for their decision. “Soon after the downgrade the rand weakened to R14.15, but gained some ground leading to Monday, trading at ZAR14.07. Today will be the first trading day [since] the downgrade and volatility and downward pressure on the rand can be expected.” S&P said: “Weak GDP growth has led to further deterioration of South Africa's public Finances, beyond our previous expectations. We think the government will attempt to introduce offsetting measures in an effort to improve budgetary outcomes, but these may not be strong enough to stabilise public finances and may weaken economic growth further in the near term.” It has lowered its long-term foreign currency rating to BB and its long-term local currency rating to BB+. The outlook on both the foreign currency and local currency ratings is stable.The agency explained: “In our view, economic decisions in recent years have largely focused on the distribution – rather than the growth of – national income. As a consequence, South Africa's economy has stagnated and external competitiveness has eroded.” It added: “The stable outlook reflects our view that South Africa's credit metrics will remain broadly unchanged next year. It also speaks to our view that political instability could abate following the party congress of the governing African National Congress (ANC) in December 2017, helping the government to focus on designing and implementing measures to improve economic growth and stabilise public finances.” Meanwhile, last week Fitch Ratings affirmed South Africa's long-term foreign-currency issuer default rating at BB+ with a stable outlook. It also pointed to the economy, citing “low trend growth, sizeable government debt and contingent liabilities and deteriorating governance standards”. And Fitch also believes the ANC elective conference in December could be a turning point “if the outcome of the conference is viewed favourably by consumers and businesses”. It added: “The run-up to the party conference has contributed to policy paralysis and we assume that the situation will not immediately improve after the conference. “Issues to be resolved include the reality that both of the main candidates will need to form complex alliances to win, that a split of the party chairmanship and the national presidency could lead to inefficiencies, and that disruptive in-fighting between factions is likely to continue.” Finally, Moody's Investors Service has placed the Baa3 long-term issuer and senior unsecured bond ratings of the government of South Africa on review for downgrade. The decision to place the rating on review for downgrade was prompted by a series of recent developments, which suggest that South Africa's economic and fiscal challenges are more pronounced than Moody's had previously assumed. It said: “The review will allow the ratings agency to assess the South African authorities' willingness and ability to respond to these rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures; structural economic reforms that ease domestic bottlenecks to growth; and improvements to SOE governance that contain contingent liabilities. “The review period may not conclude until the size and the composition of the 2018 Budget is known next February. This will also allow Moody's to assess the policy implications of political developments during the review period and the likelihood of pressures on South Africa's key policymaking institutions persisting. “In the meantime, South Africa maintains credit strengths that still support its Baa3 rating. These include deep domestic financial markets and a well-capitalised banking sector; a well-developed macroeconomic framework; and low foreign currency debt. Adherence to the Constitution and the rule of law continue to be the key pillars of strength of South Africa's institutions,” concluded Moody’s.

S&P downgrades South Africa, confirming junk status

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