Fitch downgrades South Africa on power shortages, policies that hurt private investment

By bne IntelliNews December 5, 2015

Fitch cut on December 4 South Africa’s sovereign credit rating by one notch to BBB-, citing a further weakening of both GDP growth performance and growth potential estimates.

Even after the downgrade, Fitch’s assessment is more optimistic that S&P’s view, as both agencies rate Africa’s best developed economy one notch above junk, but while Fitch assigned a stable outlook on the ratings, S&P lowered its outlook to negative. Moody’s rates the country at Baa2, two notches above junk, with a stable outlook.

Fitch, which released its rating announcement a few hours after S&P, mentioned largely the same hurdles to growth - additional delays to the availability of new electricity generation capacity, which will likely constrain growth for another two years, and weakened business confidence due to various government policies.

The agency slashed its GDP growth forecast for South Africa to 1.4% for 2015 and 1.7% for 2016 from 2.1% and 2.3%, respectively, anticipated in June. It expects growth to accelerate to 2.4% in 2017, but underlines that this is still well below the country's growth trend before 2008 of around 4% and the government’s target of 5%.

Fitch warned that a negative rating action could be triggered by a potential fiscal policy loosening, a failure to stabilise the government debt/GDP ratio, an increase in external debt to levels that raise the potential for serious financing strains, or further weakening of economic growth, “for example due to a lack of policy changes to improve the investment climate”.

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