Johannesburg – The probability of a credit rating downgrade by Standard and Poor’s (S&P) is now less than 50%, according to Citi Bank.
Citi issued a statement following the National Prosecuting Authority's (NPA's) announcemen that it has dropped charges against Finance Minister Pravin Gordhan.
According to Citi, the decision is a reflection of institutional strength, one of the factors rating agencies consider.
The “good enough” mini budget, improved gross domestic product growth trajectory and possible labour reform all contribute to the improved chances to avoid a downgrade, said Citi.
Citi added that the rating decision, scheduled for December 2, may be pushed out to 2017 so that it will not be “politicised”. S&P’s rating is currently at BBB- with a negative outlook.
Lower probability for downgrade
Similarly, Investment Solutions chief economist Lesiba Mothata said there is a lowered probability for a downgrade to junk status.
The NPA’s decision to drop charges has provided clarity on the finance minister’s ability to continue in his role, he explained.
Stanlib chief economist Kevin Lings has also said that the NPA's decision boosts Gordhan's chances to stay in his job.
“The fact that the NPA has withdrawn charges shows that the finance minister is likely to remain in his role for an extended period. That is good news," said Lings.
However, institutional strength is only one component and other risks remain, he said.
The future growth of the economy still has a strong bearing on rating agencies’ decisions. Much remains to be done to improve the economic output, added Lings.
“It is critical to implement these policy decisions to boost growth,” said Lings.
Gordhan introduced measures to improve economic growth in the mini budget delivered last week. Lings said it is important to have consistency in senior roles to ensure that policies are implemented.
Stronger currency, lookout for lower inflation
During the NPA press briefing held in Silverton, the rand strengthened to levels as low as R13.60/$. It was trading at R13.54/$ at 15:00.
Lings said the short-term change in currency may not be substantial enough to impact the South African Reserve Bank’s (Sarb's) decision to introduce rate cuts.
Both Lings and Mothata said Sarb would be looking out for lower inflation expectations in the new year.
“If inflation comes down, the monetary policy committee may cut rates and that will bring some relief,” said Lings.
Rate decisions also depend on decisions by the US Federal Reserve, he added.