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On Friday, the rand firmed to its best level since the middle of last month after S&P Global Ratings became the second major ratings agency to affirm its view of South Africa’s creditworthiness at investment grade.
S&P Global kept its rating at BBB, which is one notch above “junk” status, but it maintained a negative outlook on the rating due to South Africa’s weak growth – the local economy is expected to expand by less than 1% this year, with S&P forecasting growth of 0.6%.
Last month, Moody’s Investors Service affirmed its rating of South Africa at Baa2, which is two notches above investment grade, with a negative outlook.
The third major ratings agency, Fitch Ratings, is expected to release its latest review of South Africa soon.
The decision by S&P, which was released at 5.36pm on Friday, caused
the rand to firm to R15.09 against the dollar. This is compared with R15.30
an hour before S&P’s decision was released.
The agency warned that low growth was putting South Africa’s economic metrics at risk and could eventually weaken the government’s social contract with business and labour.
The negative outlook also signalled that S&P could lower its rating of South Africa this year or next year if policy measures did not turn the economy around.
“We could lower the ratings if gross domestic product [GDP] growth does not improve in line with our current expectations, or wealth levels continue to decline in US dollar terms,” S&P said.
“Rising political tensions are accentuating vulnerabilities in the country’s sovereign credit profile,” S&P added.
Energy improvements would likely reduce some of the economic bottlenecks, and labour and mining reforms could engender an improvement in confidence, the agency said.
“Prolonged strikes, mainly in mining and some manufacturing sectors ... continue to pose structural weaknesses to South Africa’s economy,” S&P said.
“On the fiscal side, the government is showing greater resolve to reduce fiscal deficits at a faster pace than we expected,” S&P said.
During his budget speech in February, Finance Minister Pravin Gordhan said that government would look to reduce its fiscal deficit to 3.2% of GDP this year, 2.8% in 2017 and 2.4% in 2018.
However, S&P noted that political tensions had increased in South Africa.
“We believe that these political factors – if they continue to fester – could weigh more on investor confidence than inconclusive labour or mining sector reform,” S&P said.
Looking ahead, S&P said it forecast that South Africa would grow by 1.5% next year before growth accelerated to more than 2% by 2019.
“We also estimate that real GDP per capita will stand at $5 000 (R75 500) this year and rise commensurately with growth through our forecast horizon to 2019,” S&P said.
Chamber of Mines CEO Roger Baxter said: “We are pleased at this outcome as it is in line with the reality of the situation. But we are aware that it gives the country no room for complacency.
“The chamber will play its part in working with other elements of organised business, with government and with organised labour to do what is necessary to sustain an investment-grade rating and hopefully, ultimately, to improve that rating.”
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