South Africa touch closer to junk as S&P revises outlook to negative

By bne IntelliNews December 5, 2015

Standard & Poor’s affirmed on December 4 South Africa’s BBB- sovereign credit rating, but revised its outlook from stable to negative, bringing the continent’s best developed economy closer to losing its investment grade status.

S&P said the key reason for the worsened outlook is anaemic economic growth, stemming from weak external demand and low commodity prices coupled with domestic constraints like an inadequate electricity supply and weak business confidence that inhibits substantial private sector investment.

The agency lowered its 2015 growth forecast for South Africa to 1.4% from 2.1% projected in June and predicted growth to remain subdued at around 1.6% in 2016 and only increase above 2% from 2017 as the capacity of electricity supply improves thanks to new power plants.

S&P noted that it depends on the government to strengthen business confidence by improving policy coordination and implementing delayed legislation to spur private-sector fixed investment.

“Can remember the days when S&P did finally start rating SA investment grade. I wish the reform momentum & optimism of those yrs would return,” Razia Khan, head of research on Africa at the Standard Chartered Bank, tweeted.

S&P warned, however, that South Africa could fall back into junk if GDP growth does not improve in line with its current expectations. It said that the growth outlook could be hurt by potential prolonged labour strikes, a significant negative spillover effects from the likely US rate hikes, or the impact of lower demand from China on commodity prices and export volumes.

Other potential triggers of a rating downgrade include state-owned enterprises requiring higher government support than currently expected, increased external imbalances, or less readily available funding for the country’s current account or fiscal deficits.

“A reduction in fiscal flexibility could also lead us to lower the local currency ratings, potentially by more than one notch,” S&P cautioned.

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