NewsSouthern AfricaSouth Africa awaits another ratings assessment amid Gordhan and Zuma tension

Tue,21Nov2017

Posted on Monday, 06 June 2016 12:34

South Africa awaits another ratings assessment amid Gordhan and Zuma tension

By Crystal Orderson in Cape Town

President Zuma says the positive response indicates that they realise South Africa is a nation at work. Photo©Ivan Sekretarev/AP/SIPASouth Africa dodged an investment ratings downgrade to "junk status" by Standard & Poor's on Friday but with a new Fitch assessment due later this week, that relief may be shortlived.

The rand was buoyed by S&P Global Ratings' decision to maintain South Africa's sovereign debt rating at BBB-, one notch above sub-investment grade, with the currency rising 3% against the dollar on the day.

From a political and policy perspective downgrade risks remain if political pressures on the National Treasury do not abate

However, S&P analysts maintained their negative outlook on the economy, warning that with sluggish economic growth of less than 1%, high unemployment and a looming local government election in August, the country must implement meaningful economic reforms if it is to avoid a downgrade at S&P's next assessment in December.

Meanwhile, rival agency Fitch is expected to announce its new rating for South Africa later this week, according to the Treasury, which could yet deal a blow to the economy and government.

Another factor worrying investors has been tension between Finance Minister Pravin Gordhan and President Jacob Zuma over economic reform, with the Treasury chief insisting that Zuma's growth plans remain affordable.

"From a political and policy perspective downgrade risks remain if political pressures on the National Treasury do not abate," says BNP Paribas analyst Nic Borain.

In a research note, Borain said the ratings might also be impacted by more generalised political uncertainty, including high levels of violence during the August election, a disputed result and any spread of service delivery protests or other kinds of social disruptions – including protracted or violent labour disputes – during the next six months.

Addressing thousands of supporters of the ruling African National Congress in Gauteng at the weekend, Zuma said: "The positive response of rating agencies indicates that they realise that we're a nation at work."

A junk status rating would have had a critical impact on the fragile economy, pushing up the cost of borrowing and making it increasingly hard to cover the government's budget deficit, currently running at more than 3% of GDP.

Political parties welcomed the news with the Inkatha Freedom Party's Narend Singh saying what happens in the next six months is going to be "very, very significant when Standard & Poor's have to review our rating in December."

Singh called for a tighter grip on profligate social spending and a focus on promoting infrastructure development, which would boost investor confidence.

S&P maintained the negative outlook on the rating, citing concerns about economic growth and warned it could lower the rating by year-end or next year if policy measures do not turn the economy around.

Alternatively, S&P could revise the outlook to stable if they believe economic policy pledges are being followed, triggering a surge in business confidence, increased private sector investment and signs of an uptick in growth.



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