South Africa has once again dodged the bullet that would have seen it down to junk status as ratings agency Fitch has affirmed SA’s rating at BBB – on Wednesday and kept its outlook for the country at stable.
Just two days after S&P kept SA’s ratings at BBB, above junk status,- with a negative outlook and lowered its economic growth estimate to 0.6 percent from 1.6 percent, Fitch surprised all by not keeping its rating also at BBB and its outlook at stable.
Fitch’s decision to hold SA’s sovereign credit rating above junk status will make it the third major rating agency that has now given south Africa a reprieve
“Strong policy institutions, deep local capital markets and a favourable government debt structure” were cited as balancing SA’s woes of “low trend gross domestic product growth, significant fiscal and external deficits, and high debt levels”, Fitch said, adding that the country’s GDP shrank 1.2% in the first quarter.
To improve its BBB rating, Fitch said SA needed to build and maintain a track record of improved growth performance through implementation of a growth-enhancing structural reforms.
It said, narrowing in the budget deficit and a reduction in the ratio of government debt to gross domestic product, as well as a narrowing in the current account deficit and improvement in the country’s net external debt to gross domestic product ratio s also very much needed.
Like its peers‚ Fitch highlighted rising political risk in SA‚ including concern about the Treasury.
“Political risk has increased since the previous rating review in December, although it is not out of line with BBB peers,” the agency reported.
“The dismissal of two finance ministers in a week in December, and subsequent tensions between the new finance minister Pravin Gordhan and other parts of the government have raised questions about the commitment of the government to sustained fiscal consolidation and prudent governance of state-owned enterprises.
“President Jacob Zuma has become increasingly embattled following the Constitutional Court ruling that he should repay some public funds used to refurbish his Nkandla residence and the Gauteng High Court’s ruling that the previous suspension of a 2009 corruption case against Zuma was irrational.
“Nevertheless, institutions have proved robust.”said Fitchwho believes that the ruling African National Congress (ANC) to lose some support in local elections on August 3 following the rising tension within the party ahead of the party’s conference in December 2017 where Zuma’s successor would be elected.
Meanwhile, the SA rand which had weakened by 8c to R14.98 after the news that the economy shrank 1.2% in the first quarter, miraculously recovered 10c from that level to R14.88 after the reprieve from Fitch.
Fitch however, raised its concern over SA’s average annual GDP growth over the next five years, expected to be just 2.2% against other BBB economies’ average 3.3%. GDP growth was 1.2% in 2015 and is likely to slow to just 0.7% in 2016 before recovering to 1.5% in 2017.
“Growth is held back by constrained electricity supply, concern about the deteriorating investment climate and fractious labour relations,” Fitch said.
Government has continued to make plans to improve the country’s economy through looking at the important areas the ratings agency has pinpointed. Progress has been made in addressing power supply problems, with no load shedding so far this year.
Maintenance management had also improved, additional renewable power sources had also been added to the grid and more are expected to be achieved especially as the nation’s economy if above junk status. Fitch said, though it noted that new units from the Kusile and Medupi coal-fired power stations would come online only in 2018.
Fitch however, warned that government initiatives under way including a planned national minimum wage, the recently approved land expropriation bill and the planned revision of the mining charter could deter investment.