Ratings agencies don’t make it easy on us by relying heavily on their insider’s jargon. But at least they do telegraph credit rating adjustments well ahead of time. Most South Africans will wake up today unaware of how Friday’s double ratings blow edges the nation closer to the brink of financial disaster. In the credit rating world occupied by three global players that matter – S&P, Moody’s and Fitch – there is a thin line between the widespread acceptability of “investment grade” and the polecat status of junk. On Friday, both S&P and Fitch downgraded South Africa’s credit rating to the razor edge of BBB minus. Fitch brought its rating into line with that of the other two. S&P adjusted its outlook to “negative” which means without a dramatic turnaround in the economic management of the country, the next rating adjustment will be down. Falling a single notch from BBB minus takes a credit rating into “junk”, the level where professional investors – pension funds, asset managers, hedge funds – are stopped by their own rules from owning your securities. Lower demand for South African assets, in this case tradable Government debt, causes its price to fall. In the bond market that translates into being forced to pay a higher interest rate when the nation next borrows, as developing countries like SA running budget deficits must do. In summary, bad economic management leads to credit downgrades and, ultimately, a drop into “junk” status. After Friday, South Africa is now on the cusp. Unless the Zuma Administration changes direction, fast, the next news from ratings agencies is going to prove very costly indeed for a country that’s already paying over R100bn in interest payments on its Government debt. RW Johnson warned us. – Alec Hogg
By Stella Mapenzauswa
JOHANNESBURG, Dec 5 (Reuters) – South Africa’s Treasury said on Saturday it was committed to reducing constraints on the ailing economy, including chronic power shortages, hours after Fitch cut its credit rating while Standard & Poor’s changed its outlook to negative from stable.
“Government is aware that the country’s economic growth performance needs to be improved in a sustainable manner and has therefore made the resolution of the energy challenge an immediate priority,” the Treasury said in a statement.
Fitch downgraded South Africa’s sovereign credit rating by one notch to BBB-, the lowest investment grade category, on Friday, citing the slowing economy and rising debt. It assigned a stable outlook to the rating.
The move came after Standard & Poor’s kept its own rating at BBB- but lowered the outlook to negative from stable, saying this reflected the view that economic growth might be lower than expected.
The third main ratings agency, Moody’s, rates South Africa at Baa2 after cutting it from Baa1 in November last year, citing poor prospects for medium-term growth and rising public debt. Its outlook is stable.
S&P said on Friday it expected GDP growth for Africa’s most developed but struggling economy to remain around 1.6 percent in 2016, and only increase above 2 percent from 2017 as the capacity of electricity supply improved.
Fitch also slashed its 2015 growth forecast, to 1.4 percent from 2.1 percent, and lowered the projection for next year to 1.7 percent from 2.3 percent.
In October the Treasury cut its economic growth forecast for 2015 to 1.5 percent from the 2 percent predicted in February, citing domestic energy constraints and the impact of a global slowdown.
The Treasury said on Saturday the government had set out a series of urgent reforms to build a more competitive economy, including investing in infrastructure, reforming the running of state owned firms and effecting labour market reforms to help avoid protracted strikes.
The government had stuck to its spending limits for the past three years and was on track to stay within the expenditure ceiling in 2015/16, it added.
“Continued revenue growth, strict adherence to the planned expenditure ceiling, as well as the proposed long-term fiscal guideline of linking government spending with long term growth are projected to result in gross debt stabilising at 49.4 percent of GDP in 2018/19,” the Treasury said.
By Kevin Crowley and Rene Vollgraaff of Bloomberg
(Bloomberg) — South Africa’s National Treasury says it has enough foreign currency deposits to repay its current and medium-term debt after the country had its credit rating cut to the lowest investment-grade status by Fitch Ratings Ltd., in line with the assessment of Standard & Poor’s.
“Whilst Fitch and S&P rates our foreign currency debt riskier than our local currency debt, government’s total foreign currency debt as percentage of total debt is currently below 10 percent,” the Treasury said in an e-mailed statement Sunday. “Government holds foreign currency deposits that are sufficient to meet its current and medium-term foreign currency commitments.”
The government said it needs to improve economic growth by stabilizing the country’s power supply, changing labor rules to avoid protracted strikes and improving the governance of state- owned companies that are draining resources. The economy, the second-largest in Africa after Nigeria, narrowly avoided a recession in the third quarter, posting 0.7 percent annualized growth after a contraction in the previous three months.
“Government is aware that the country’s economic growth performance needs to be improved in a sustainable manner and has therefore made the resolution of the energy challenge an immediate priority,” the Treasury said.
Falling metal prices, electricity shortages and low global demand have stifled output. The central bank projects gross domestic product will expand 1.4 percent this year, which would be the slowest pace since a recession in 2009.
Along with improving electricity generation, the government will focus on “rationalizing state holding” of assets and encourage “private-sector participation,” it said.
Fitch cut South Africa’s credit rating one level to BBB- on Dec. 4 and changed the outlook to stable from negative. S&P changed the outlook on its BBB- rating to negative from stable earlier in the day.
