South Africa avoids S&P downgrade

With the last of the large global credit ratings agencies, Standard & Poor’s (S&P) avoiding a downgrade of South Africa’s sovereign credit rating, the country has successfully navigated through the possibility of junk status. Ratings agencies Moody’s and Fitch released their decisions at the end of November.

According to Andre Botha, dealer at TreasuryOne, the announcement by S&P was expected, following those of Moody’s and Fitch. However, while there may be some relief at present, the general belief is that the can is just being kicked further down the street.

Professor Raymond Parsons, an economist at the North West University School of Business and Governance, said: “It is very good news that S&P is also giving SA more time to get its house in order. Although S&P lowered the local currency rating it still remains above junk status. But the underlying strong and converging messages of the three rating agencies should still be taken very seriously by decision makers in the public and private sectors. The three rating agencies now all reflect negative outlooks, and the extra time must be used wisely to avoid a worst-case scenario.”

Peter Attard Montalto, an analyst at Nomura, stated that the announcement by S&P was a partial victory for National Treasury, who work through every means available to avoid a downgrade to sub-investment grade.

However, in its decision, S&P highlighted that the long run fiscal and debt outlook are deteriorating faster than previously presumed. Montalto noted that S&P remain concerned about the risks of increasing political noise and contestation in 2017.

The next ratings decisions are set to take place in June 2017, with several experts asserting that the avoided downgrade, may be simply be postponed to next year.

Parsons added: “Together with Moody's and Fitch, these decisions must therefore be seen as friendly warnings, rather than as reprieves, about what SA is seen to be doing and implementing over the next few months. Although the S&P assessment also recognises the changes and improvements made so far in certain areas of policy, the reality is that the economy remains on the cusp of 'junk status'. SA is still at only one notch above 'junk' in both S&P and Fitch assessments. SA needs to break this mould sooner, rather than later, by implementing polices which put SA on a much higher growth trajectory.”

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