Yesterday, S&P Ratings lowered the long-term foreign currency sovereign credit rating on the Republic of South Africa to ‘BB+’ from ‘BBB-‘ and the long-term local currency rating to ‘BBB-‘ from ‘BBB’.
Also, S&P downgraded the short-term foreign currency rating to ‘B’ from ‘A-3’ and the short-term local currency rating to ‘A-3’ from ‘A-2’.
While the outlook on all the long-term ratings is negative, South Africa’s long-term national scale rating was lowered to ‘zaAA-‘ from ‘zaAAA’. However, S&P ratings affirmed the short-term national scale rating at ‘zaA-1’.
In a nutshell, the S&P rating action reduced SA to the much talked about junk status.
The rationale behind the downgrade to junk status was identified to be the divisions in the ANC-led government which led to changes in the executive leadership.
Precisely, S&P Ratings specified that the axing of the finance Minister, Pravin Gordhan have put policy continuity at risk in the country. That, S&P Ratings explained, increased the likelihood that economic growth and fiscal outcomes could suffer.
Also, S&P Ratings indicated that contingent liabilities to the state, especially in the energy sector, are on rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner.
“In our view,” S&P Ratings said, “higher risks of budgetary slippage will also put upward pressure on South Africa’s cost of capital, further dampening already-modest growth.”
S&P Ratings further stated thus:
“Internal government and party divisions could, we believe, delay fiscal and structural reforms, and potentially erode the trust that had been established between business leaders and labour representatives…
An additional risk is that business may now choose to withhold investment decisions that would otherwise have supported economic growth.
We think that ongoing tensions and the potential for further event risk could weigh on investor confidence and exchange rates, and potentially drive increases in real interest rates.”
S&P upheld that the negative outlook of its SA ratings was inspired by the view that political risks will remain elevated this year. And, that policy shifts are likely to undermine fiscal and growth outcomes.
The global rating agency warned that it will consider lowering ratings if fiscal and macroeconomic performance deteriorates further. Likewise, they will revise the outlook to stable if political risks reduce and economic growth strengthen.
Meanwhile, the government has acknowledged S&P’s downgrade of South Africa to junk status saying it reflects the need to speed-up inclusive growth.
“This rating announcement calls for South Africans to reflect on the need to sustain and act with urgency to accelerate inclusive growth and development so that we can reverse the triple challenge of poverty, unemployment and inequality.
“Reducing reliance on foreign savings on funding investment and relying less on debt to finance public expenditure will secure South Africa’s fiscal sovereignty and economic independence.
“Government remains committed to making sure that its work with business, labour and the civil society continues in order to improve the business confidence and implement structural reforms to accelerate inclusive economic growth,” stated the National Treasury.