S&P may downgrade SA by mid 2017- analyst

Johannesburg – There’s a “strong chance” ratings agency Standard and Poor’s (S&P) may downgrade South Africa’s foreign rating to sub-investment grade by June 2017.

It is also possible that Fitch is likely to maintain their negative outlook, and there is a “high probability” that Moody’s could downgrade the rating by one notch from Baa2.

This is according to an economic outlook report for 2017, issued by Momentum Investments economist Sanisha Packirisamy.

The report shows that growth is expected to improve marginally in 2017 to above 1%. However political uncertainty will still have a bearing on the rate of growth.

Uncertainty ahead of the ANC National Executive Committee (NEC) elective conference in December next year could “deter” fixed investments, stated Packirisamy.

Ratings agencies previously highlighted concerns over political stability in their recent assessments of the country’s credit ratings. The ratings agencies each kept the sovereign rating above sub-investment grade, however they indicated more should be done to instill confidence about the country’s growth prospects, explained Packirisamy.  

READ: S&P's ratings decision a partial victory, says Montalto

“The ratings agencies warn that rising perceptions of political interference in key spheres of government institutions threaten South Africa’s macroeconomic performance, public finances and consequently the ratings outlook.”

Previously, Fin24 reported that S&P’s decision to downgrade the local currency reflected the ratings agency’s concerns over politics and the poor growth outlook.

Further, foreign capital flows are at risk given the decision by government to withdraw from the International Criminal Court (ICC). Other influences include state capture and the failure to comply with global regulations through the Financial Intelligence Centre Amendment (FICA) bill, currently referred back to the National Assembly, stated Packirisamy.

Besides domestic events, South Africa’s potential growth may be impacted by US and China trade relations. This could impact commodity prices negatively.

ALSO READ: What SA should do with ratings breather - Treasury

A sub-investment grade status could translate into higher interest payments, a weaker rand, a higher cost of living, reduced fiscal space and lower confidence, according to Treasury. This will translate into low investment and weak job creation.

“We expect a downgrade of the foreign rating into junk status to induce an appropriate response from the SA authorities,” stated Packirisamy.  

Government will likely to stick to fiscal consolidation and introduce structural reforms to reverse the potential sub-investment grade rating. This could take five years to recover from.    

Last week, at a press briefing on the final cabinet meeting, Minister in the Presidency Jeff Radebe said that the work of team South Africa to avert a downgrade would continue in 2017.

“Team SA, which was appointed by the president, has not stopped work. It will continue. The partnership is very valuable to the government.

"There is a united front as we have seen on many occasions where the minister of finance, representatives of business are always working together to ensure we are on track," he said. 

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