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Fitch downgrade of South Africa’s domestic debt a risk to sovereign rating

By Mfuneko Toyana
Posted on Tuesday, 26 July 2016 09:36

Ratings agency Fitch downgraded South Africa’s local currency debt rating by one level to just a notch above subinvestment grade in what the firm said was a review of its sovereign rating portfolio across several countries.

it also serves as a timely reminder of the risks of a downgrade that lie ahead and the urgency of actions required to reinvigorate the economy

Fitch downgraded South Africa’s rand denominated debt to BBB- in a review published on Friday. South Africa was one of 23 countries to have their local currency rating cut. About 90 percent of South Africa’s 2.2 trillion rand ($153.10 billion) debt is in local currency.

The Treasury said the move was a timely warning to the government to act decisively to boost growth in the continent’s most industrialised economy.

“Although the action represents an alignment, it also serves as a timely reminder of the risks of a downgrade that lie ahead and the urgency of actions required to reinvigorate the economy,” it said in a statement.

Fitch and S&P Global Ratings now both have South Africa’s local currency debt rating a step away from subinvestment. Rand Merchant Bank analyst Isaah Mhlanga said the downgrade was significant because it risked South Africa’s position in global bond indices.

However, some analysts said the economy would have to deteriorate sharply for the local debt rating to be pushed into “junk”. Both Fitch and S&P rate South Africa’s sovereign debt a notch above subinvestment.

Moody’s has the country’s debt two level above speculative grade but with a negative outlook. While all three agencies affirmed their ratings in June, the next round of reviews in December are likely to see South Africa downgraded, with the growth outlook having deteriorated significantly.

The central bank said last week it expected zero percent growth in 2016, while the International Monetary Fund cut its growth estimate to 0.1 percent for the same period from a previous forecast of 0.6 percent.

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