Ratings agency Standard & Poor’s has downgraded South Africa’s rand-denominated debt, while holding its international debt steady. This means that for now, South Africa has avoided the dreaded junk label.
South Africa’s debt has two components – local debt which is largely taken up by South African banks and institutions and foreign debt. About 90% of government’s debt is denominated in SA rands, with the remainder in foreign currency.
Until now the local currency rating was two notches above junk status, but it has just been cut to ‘BBB’, one notch above investment grade. This brings the local currency rating in line with South Africa’s foreign currency rating. The outlook remains negative.
“South Africa continues to depend on resident and nonresident purchases of rand-denominated local currency debt to finance its fiscal and external deficits. Its financing needs have risen beyond our previous expectations, with general government debt set to increase by an average of 4.9% of GDP over 2016-2018, to reach gross debt of 54% of GDP in 2019,” S&P said in a statement. “The proportion of rand in global foreign exchange turnover has also declined to just below 1% on average over the past three years.”
This brings S&P in line with the Moody’s and Fitch ratings agencies which do not assign different ratings to government’s local currency and foreign currency debt.
The lowering of the long-term local currency ratings is because of the MTBPS once again extending the horizon on narrowing the fiscal deficit. “This, in S&P terms, means that fiscal financing needs are increasing beyond their previous base-case expectations,” adds Christie Viljoen, economist at KPMG.
The long-term foreign currency rating was left unchanged. The reasons behind this, Christie says, include a marginal reduction in their economic growth forecast for 2016-17; the view that South Africa’s institutions remain strong (although it’s possible that S&P could have weakened this assessment) and the acknowledgement of positive developments in the labour sphere.
In assigning the foreign currency rating, S&P pays attention to factors such as South Africa’s external accounts in addition to “domestic” factors such as GDP growth and the level of GDP per capita. This highlights the importance of the adequacy of South Africa’s foreign exchange reserves, the size of the current account deficit and the underlying trend in this deficit.
However S&P noted that political events have distracted from the real growth-enhancing reforms, while low GDP growth continues to affect South Africa’s economic and fiscal performance and overall debt stock.
The negative outlook reflects the potentially adverse consequences of persistently low GDP growth for the public balance sheet.
“I believe S&P will downgrade South Africa to sub-investment grade in 2017 because achieving the 1.4% economic growth rate that the agency wants will be tough,” says Christie. This will result in a continuance of the trend of being unable to make fiscal deficit projections – resulting in a continued rise in government debt.
Stocks on Friday were also hit by worries over the rating, with losses seen across the board amid cautious investing. The benchmark Top-40 Index was down 1.36% to 42 822 points with petrochemical company Sasol leading the losers, according to Reuters. The broader All-Share Index fell 1.34% to 49 256 points.
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