South Africa Avoids Credit Rating Downgrade To Junk

South Africa Avoids Credit Rating Downgrade To Junk

South Africa has avoided losing its investment grade credit rating from Standard & Poor’s, which upheld the country’s sovereign debt rating at BBB- but warned about the consequences of low economic growth, BBC reported.

There were concerns S & P would cut South Africa to so-called “junk status,” making it more expensive to borrow and harder to plug a budget deficit estimated at 3.2 percent of gross domestic product for the 2016-2017 financial year.

In May, South Africa escaped a downgrade from credit rating firm Moody’s Investors Service, which held its rating at Baa2.

Fitch Ratings is expected to issue its review next week, according to Finance Minister Pravin Gordhan, Reuters reported. Like S&P, Fitch rates South Africa one rung above subinvestment grade.

In December, S&P revised its outlook on South Africa’s rating from stable to negative, citing fears that economic growth might be lower than expected.

The South African economy expanded by 1.3 percent in 2015. In May 2016, the International Monetary Fund cut its 2016 forecast for South Africa from 0.7 percent to 0.6 percent.

The South African Treasury welcomed the S&P decision, saying it would give the government time to show the effect of its economic reforms.

South Africa has not been below investment grade since 1994, the year the country became a democracy.

Many expected South Africa to lose its investment-grade status due to weak growth, large deficits and political scandals surrounding President Jacob Zuma, including hiring and firing two finance ministers in December, Reuters reported.

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“Rising political tensions are accentuating vulnerabilities in the country’s sovereign credit profile,” S&P said in a statement, warning that the outlook remained negative.

The outlook reflects “the potential adverse consequences of low GDP growth and signalling that we could lower our ratings on South Africa this year or next if policy measures do not turn the economy around,” S&P said.

Ultimately what S&P wants  to see is an improvement in growth prospects, an ongoing commitment to deficit consolidation and less political instability,”said Jeffrey Schultz, an economist with BNP Paribas Cadiz Securities, in a Reuters interview.

“If we don’t see that come December then I still think that a downgrade into sub-investment grade territory for our foreign currency rating is very much still on the cards.”

What would an investment downgrade mean for South Africa?

The effects on the real economy would be significant, eNCA reported.

A downgrade to noninvestment grade is likely to increase a sovereign’s short-term foreign currency borrowing costs by 80 basis points, according to a recent Reserve Bank study of 70 countries.

A weaker rand, underperforming equities and higher borrowing costs for the state would contribute to inflation, eroding personal wealth and higher debt repayment costs on public debt.

ENCA analyzed changes over the last 30 years in sovereign ratings assigned by the big three rating agencies — S&P, Fitch Ratings and Moody’s.

Fifteen countries have had their investment-grade ratings revoked. It took an average of seven years to regain their status. These include Colombia, Croatia, Hungary, Iceland, India (twice), Indonesia, Ireland, Republic of Korea, Latvia, Romania, Slovakia, Slovenia, Thailand, Turkey and Uruguay.