Economists cheer S&P ratings decision

Cape Town - Although economists welcomed Standard & Poor’s decision to keep South Africa’s credit rating unchanged, they said it was only a matter of time before South Africa would be downgraded to junk status.

The rand was on the front foot, trading firmly at R15.10 at 18:30 after a double dose of positive news.

The local unit received an unexpected boost on Friday afternoon from a dismal May jobs report out of the US.

At 17:19 the rand was trading at R15.29 against the greenback from R15.57 before the US Labour Department released the data and ahead of the long awaited Standard and Poor's (S&P) credit ratings assessment.

“After the poor US non-farm payroll print, the chance of an interest rate hike in June has come down from around 80% to 30%. This has really put the dollar on the back foot today," said Wichard Cilliers, chief currency dealer at TreasuryOne.

“Currencies globally are benefiting from this."

US non-farm payrolls showed only 38 000 jobs were added in May versus 164 000 expected. The US unemployment rate was down to 4.7%.

S&P announced just after market close on Friday that it kept South Africa's investment grade unchanged, with the outlook still negative. The rand immediately started to strengthen to trade at R15.10/$ at 18:30.

"We saw a bigger move after the very poor US non-farm payroll numbers," said Cilliers. "I don’t think anyone expected them to be that low. There cannot be a hike in June or July now."

Adam Phillips of Umkhulu Consulting said the S&P announcement was more relief than good news.

"We have had a reprieve and there is still a great deal of work to be undertaken on the economy in general. We will get a better indication with regards to the rand on Monday when all SA corporates get involved.

KPMG economist Christie Viljoen said the S&P decision was to be expected, but "it’s probably only a matter of time before they would downgrade us to junk status”.

Viljoen said the ratings agency would probably keep a close eye on GDP figures which would be released in due course.  

“They’ll probably want to see if we manage to improve our fiscal position and if the political situation stabilises after the local government elections in August.” 

PSG investment economist Dawie Klopper said the news was what everybody was hoping for, but that hard work lies ahead if Finance Minister Pravin Gordhan is to achieve the fiscal goals he set out in his budget speech in February. 

Francois Botha, head of multi-management at Novare, said to avoid a downgrade later this year, government would have to demonstrate a commitment to decrease spending. 

“The government desperately needs their income to increase. In order to do this they’ll have to focus on measures which will grow GDP, reduce the unemployment rate and increase the tax base,” Botha said. 

However, South Africa is already experiencing high inflation and the South African Reserve Bank is likely to impose further interest rate hikes this year to bring inflation back within the target band. This will put further pressure on economic growth.

“If we don’t find a catalyst for growth within the next few months then a downgrade would be inevitable,” Botha said. 

The rand

S&P on Friday affirmed South Africa’s long and short term foreign and local currency bond ratings at ‘BBB-/A-3’ and ‘BBB+/A-2’ respectively.

The foreign currency bond rating remains one notch above sub-investment grade whereas the domestic currency bond rating remains three notches above subinvestment grade.

Among the risk factors S&P listed are:

• low GDP growth is putting South Africa's economic metrics at risk and could eventually weaken the government's social contract with business and labour; and
• Rising political tensions are accentuating vulnerabilities in the country's sovereign credit profile.

Still, it said, energy sector improvements will likely reduce some of the economic bottlenecks and pending finalisation of labour and mining reforms could engender a positive confidence shock.

It noted that "on the fiscal side, the government is showing greater resolve to reduce fiscal deficits at a faster pace than we expected".

"We are therefore affirming our 'BBB-/A-3' foreign currency and 'BBB+/A-2' local currency ratings on South Africa."

S&P maintained the negative outlook on the rating, citing concerns about economic growth and warned it could lower the rating by year-end or next year if policy measures do not turn the economy around.

Alternatively, S&P could revise the outlook to stable if they observe policy implementation that leads to an improved business confidence environment and increased private sector investment and ultimately result in higher levels of growth.

"The outlook remains negative, reflecting the potential adverse consequences of low GDP growth and signaling that we could lower our ratings on South Africa this year or next if policy measures do not turn the economy around," the agency said.

National Treasury welcomed S&P’s decision, saying the benefit of this decision is that South Africa is given more time to demonstrate further concrete implementation of reforms that are underway aimed at achieving higher levels of inclusive growth and place public finances on a sustainable path.

"The rating outcome demonstrates that South Africans can unite, especially during difficult times, to achieve a common mission. In this regard, government thanks all social partners for their efforts towards achieving this positive outcome and urges our partners to continue its close working relationship with government over the period ahead."

Treasury said the government is aware that the next six months are critical and there is a need to step up the implementation of the 9-point plan and other measures to boost the economy.

Government, business and labour will collectively intensify efforts aimed at:
i) Restoring confidence and boosting investment amongst local and international investors;
ii) Unblocking obstacles to faster employment growth in key sectors; and
iii) Undertaking fiscal, State-Owned Companies (SOCs) and regulatory reforms.

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