Further credit rating downgrade for SA could arrive this year.

2013-06-26 17:29

In late 2012 and early 2013 the three major rating agencies (Moody’s, Standard &Poor and Fitch) downgraded South Africa’s credit rating. The three agencies cited deteriorating economic prospects, which were said to be affecting public finances and exacerbating social and political tensions as the main contributors to the downgrades.

With little improvement in economic conditions in the first half of 2013 and an increasingly volatile currency on a downward trajectory it seems as though another credit rating downgrade may well be on the cards.

In the post-financial crisis period, South Africa has failed to address a number of structural weaknesses, which include weak human capital, low productivity growth, rigid employment and infrastructural deficiencies. Furthermore, unlike many of the nations emerging market economies’ (EMEs) counter parts, the SA economy is still struggling to attract a sufficient amount of Foreign Direct investment (FDI) to finance its current account deficit, despite the global environment being more supportive.

Instead in the post crisis period, the financing structure of the current account is considerably made up of portfolio inflows, which in theory could be gone by the time you finish reading this post. This therefore leaves the economy vulnerable to a massive reversal in the current account, as was the case for many EMEs in the nineties and for the SA economy in October 2008 when the JSE experienced a net withdrawal of R67bn in foreign funds.

The growth outlook for the South African economy is also worrying, with the growth forecasts by the SARB revised down from 2.7% to 2.4% for 2013 and from 3.7% to 3.5% for 2014.

This weak growth outlook is in tandem with a deteriorating inflation outlook, which is expected to breach the reserve bank’s target band (3% - 6%) later this year, leaving the bank with little room to manoeuvre.

In addition to the financing structure of the current account deficit and weak growth outlook, another reason that may sway the agencies’ to further downgrade SA’s credit rating is the unemployment rate. Currently unemployment remains stuck at around 25% (narrow definition) and 35% (broad definition), with youth unemployment hovering around 50%.

Reducing the unemployment will go a long way in addressing many of the country’s social divides, which include alarmingly high poverty and inequality. However, other than the contentious Youth wage subsidy proposed in the NDP, there seems to be no clear strategy to curtail the unemployment rate.

With Moody’s and S&P maintaining negative outlooks for their sovereign ratings for the SA economy, I believe that we could see a downgrade this year. Follow me on twitter BantuMahali

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