• Still in discussions on potential downgrade, S&P’s Reuss Says
  • Dialog between business and government is a ‘positive’

Economic growth in South Africa “has continued to disappoint,” S&P Global Ratings said, three weeks before the company is due to complete a review that may see the country cut to junk.

S&P may lower the nation’s credit rating to non-investment grade when it announces the result of an assessment of South Africa’s BBB- ranking on June 3. Discussions on the decision are still underway, S&P Managing Director for sub-Saharan Africa Konrad Reuss said in Johannesburg on Friday.

“Weaknesses in the South African economy have really come to the fore,” he said. “Growth is the crux at the moment” and S&P believes “we are in the right place with our rating,” he said.

South Africa’s central bank has cut its forecast for economic expansion this year to 0.8 percent, predicting the slowest growth since a recession in 2009. Factory and mining production, which together account for about a fifth of the economy, contracted in March and unemployment surged to the highest in at least eight years, according to the national statistics office. The rand has slumped 23 percent against the dollar since the start of 2015 and was 1.4 percent weaker at 15.2079 by 12:59 p.m. in Johannesburg.

While S&P has taken note of the South African Treasury’s efforts to deliver on fiscal consolidation, the company sees “execution risk” on the plans, Reuss said. It is also positive for South Africa that business and government are increasingly talking to each other about how to boost the economy, he said.

“It’s important to see this dialog happening,” he said. “One wants to see what are the tangible outcomes and how quickly they are implemented.”

Reuss said a potential downgrade that restored the outlook on South Africa’s rating to stable might be we viewed as a positive by some investors. “That’s something I believe markets would take comfort in.” South Africa’s response to a cut should be “if you have a downgrade, take stock and fix the problem,” he said.

Moody’s Investors Service affirmed the continent’s most-industrialized economy’s credit rating at Baa2, two levels above junk, on May 6 and kept its outlook on the rating on negative. S&P and Fitch Ratings Ltd., which both have South Africa one level above junk, will assess the country over the next two weeks, Finance Minister Pravin Gordhan said May 9.

‘Nenegate’ Unexpected

The South African Reserve Bank hopes the Moody’s decision “might help others to say there are initiatives under way, there is a heightened sense of urgency there, there are higher quality dialogs that are taking place,” Deputy Governor Daniel Mminele said in an interview Friday in the Rwandan capital, Kigali. It might be a chance “for them to maybe carefully consider whether moving at this particular junction may not be premature.”

S&P will lower the nation’s rating to non-investment grade by the end of this year, according to 12 of 13 economists and analysts surveyed by Bloomberg. Four see the downgrade to BB+, which will put South Africa on par with Turkey and Indonesia, coming as early as next month. Only four of the 13 said Fitch will lower its assessment by the end of the year.

Asked about the timing of a possible downgrade, Reuss said S&P would rather communicate its view than seek to avoid delivering negative news. “If we believe a rating has to change, it is more important we get it to the market.”

President Jacob Zuma’s abrupt Dec. 9 dismissal of then Finance Minister Nhlanhla Nene caused the rand to plummet and bond yields to surge. Reuss said he didn’t see “Nenegate” coming and that he is often asked about the episode.

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