The Sunday News
CAPE TOWN — Standard & Poor’s (S&P) downgraded South Africa’s credit ratings, handing another blow to an economy struggling with labour, growth and electricity challenges. The long-term foreign currency sovereign credit rating was lowered to ‘‘BBB-’’ from “BBB” and the long-term local currency rating to ‘‘BBB+’’ from ‘‘A-’’.
The short-term foreign currency rating was also downgraded to ‘‘A-3’’ from ‘‘A-2’’. The agency affirmed the short-term local currency rating at ‘‘A-2’’, adding that the outlook is stable.
It also affirmed the long- and short-term national ratings at ‘‘zaAAA’’ and ‘‘zaA-1’’.
“The downgrade reflects our expectation of lacklustre GDP growth in South Africa, against a backdrop of relatively high current account deficits, rising general government debt, and the potential volatility and cost of external financing,” S&P’s said in a statement.
It also warned that second quarter growth will likely contract or be feeble as a result of the prolonged strike in the platinum sector.
The GDP shrank in the first quarter and the second quarter experience the same weak data then the country will be in a technical recession.
The agency pointed also out that the effects of the strike will see disappointing growth for the full year.
“We now expect full-year GDP growth of 1,9 percent in 2014, rising to 2,9 percent in 2015 and 3,2 percent in 2016.”
It also expects government debt to grow to 46 percent by 2017.
“General government debt, net of liquid assets, increased to 40 percent of GDP in 2013, from 23 percent in 2008, and we expect it to reach 46 percent by 2017.”
S&P’s also took a subdued view of the government taking measures to bolster the economy.
“While we think that President Jacob Zuma’s newly-elected administration will continue the policies of his first administration, which controlled fiscal expenditure and fostered broadly stable prices, we do not believe it will manage to undertake major labour or other economic reforms that will significantly boost GDP growth.
“At the same time, we also do not believe the ANC-led government will entertain radical policies (such as the nationalisation of mines).”
It also noted that Eskom’s funding needs may push up the government’s guarantees.
It said the government has R350bn (about 10 percent of GDP) available in potential guarantees for Eskom, which currently uses about R120bn of these guarantees.
“Eskom’s operating margins have been hurt by the lack of rate relief from the regulator as well as other factors and we believe Eskom’s funding needs may require the government’s guarantee envelope to increase by 2017.”
The agency issued a stable outlook on the hopes the labour strife will be solved.
“The stable outlook reflects our view that current labour tensions will be resolved and that lacklustre economic performance will not affect South Africa’s fiscal and external balance beyond our revised expectations.”
S&P’s cautioned that it could lower the ratings if the business and investment climate weakens further, if external imbalances continue to increase, or funding for the current account or fiscal deficits becomes more difficult or costly.
However, it added that it could also raise the ratings if an improvement in investment and economic growth prospects produces stronger government and external debt positions than they currently expect.
On Friday morning, Fitch ratings agency also revised South Africa’s outlook to negative from stable. It also raised concerns about the deteriorating growth outlook stemming partly from the strike in the platinum mining sector. — Fin24
