Relief as Fitch, S&P maintain South Africa’s ratings, but key risks remain

By bne IntelliNews December 15, 2014

Two of the three major rating agencies, Fitch and Standard & Poor’s, provided some relief for South Africa by maintaining their credit rating assessments, although recent hefty power supply disruptions  have added to key concerns for the economy that include lacklustre growth and the threat from further strike auctions. In addition, the country’s large current account and fiscal deficits and its rising government debt remain major weaknesses and any deterioration could lead to a downgrade, both agencies warned.

Fitch affirmed South Africa’s long-term foreign and local currency issuer default ratings (IDR) at BBB and BBB+, respectively, with negative outlook. The more pessimistic S&P kept its long- and short-term foreign currency sovereign credit ratings on the country at BBB-/A-3, with stable outlook. At their previous reviews in June, Fitch lowered its outlook from stable to negative, while S&P cut the country’s sovereign rating by one notch to the lowest rung on its investment grade ladder.

We remind that the third major agency, Moody's cut on November 6 South Africa’s sovereign rating by one notch to Baa2 with stable outlook, citing as key drivers poor medium-term growth prospects and a potential further increase in the government debt-to-GDP ratio.

According to Fitch, which is more likely to downgrade South Africa as it rates it higher than S&P and has a negative outlook, a rating cut could be prompted by sustained weak GDP growth and a failure to boost growth potential, failure to reduce the budget and the current account deficits, and failure to stabilise the government debt-to-GDP ratio.

Fitch expects general government debt to rise to 48% of GDP in fiscal 2014/15 from 26% at end-2008, and above the BBB median of 40%. It anticipates the ratio to peak at around 50% in 2016/17. The large current account deficit, which exposes the country to risks related to shifts in global risk appetite and subsequent capital flow reversals, is seen falling from 5.4% of GDP in 2014 to 4.8% in 2015, helped by the drop in oil prices. The gap remained high in Q3, at 6% of GDP, narrowing less-than-expected from 6.3% in Q2.

However, S&P expects the current account shortfall to shrink only slightly next year – to 5.4% of GDP from a projected 5.5% in 2014. It anticipates general government debt, net of liquid assets, to increase to 44% of GDP by 2017 from 39% in 2013 and 22% in 2008.

Both agencies warmed that although a small part (around 9%) of the government's debt stock is denominated in foreign currency, non-residents hold about 37% of the domestic debt, which could make financing vulnerable to investor sentiment.

Both agencies expect GDP growth to recover to a still weak 2.5% next year from estimates of about 1.4% this year. An improvement in investment and economic growth prospects (through successful structural reforms) and a reduction in the budget and current account deficits, as well as better-than-expected government debt dynamics are necessary conditions for a potential rating upgrade.

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