Cape Town – Ratings agency Fitch on Wednesday affirmed South Africa's investment grade credit, and surprisingly kept its outlook stable, but it warned that political and growth concerns should be addressed.
This follows rating reviews by Moody’s in May (which affirmed its ratings at Baa2/P-2 and assigned a negative outlook) and Standard & Poor’s last week Friday (which affirmed its BBB- level with a negative outlook). Importantly, all three ratings agencies have kept South Africa above non-investment grade – also known as junk status.
Most economists believed Fitch would change the future prospects for the rating to negative, which it did not do.
“The 'BBB-' rating reflects low trend gross domestic product growth, significant fiscal and external deficits, and high debt levels, which are balanced by strong policy institutions, deep local capital markets and a favourable government debt structure,” it said.
Stats SA announced 20 minutes earlier that South Africa recorded a negative growth rate of -1.2% in the first quarter of 2016.
READ: SA's GDP dives by 1.2%
Fitch said political risk “increased since the previous rating review in December 2015, although it is not out of line with 'BBB' peers”.
“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,” Fitch warned.
“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. However, Fitch expects the governing African National Congress (ANC) may lose some support in local elections on 3 August 2016. Tensions within the ANC are also increasing ahead of the conference in December 2017 to elect Zuma's successor as ANC president.
“Fitch views political risks mainly in terms of the impact on the economy and public finances. Fitch's base case is that the government remains committed to fiscal objectives set out in February's budget, but political tensions increase risks to progress on fiscal consolidation and growth-enhancing measures, and raise the chances of policy missteps.”
READ: The full Fitch statement
Fitch said that GDP growth remains low, saying it 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, concerns about the deteriorating investment climate and fractious labour relations," it said.
"The government has made progress in addressing power supply problems, with no load shedding so far this year, as maintenance management has improved and additional renewable power sources have been added to the grid, although new units from the Kusile and Medupi coal-fired power stations will only come on line in 2018."
4 reasons why SA could be downgraded to junk next time
Fitch said the following risk factors, individually or collectively, could trigger negative rating action:
1. A loosening of fiscal policy, such as upward revisions to expenditure ceilings, leading to a failure to stabilise the ratio of government debt/GDP; or an increase in contingent liabilities.
2. Failure of GDP growth to recover sustainably, for example due to a lack of policy changes to improve the investment climate.
3. Rising net external debt to levels that raise the potential for serious financing strains.
4. Heightened political instability that adversely affects the economy or public finances.