- Debt assessment left unchanged at one level above junk
- S&P earlier kept rating at BBB- with negative outlook
Fitch Ratings Ltd. has maintained its outlook on South Africa’s credit rating at stable, giving the country more time to avoid having its debt assessment cut to junk, even as the economy contracted in the first quarter.
South Africa’s foreign-currency rating was kept at BBB-, the lowest investment-grade level, Fitch said in a statement Wednesday. The assessment is better than that of S&P Global Ratings, which affirmed its BBB- level with a negative outlook on June 3 and warned it could still reduce this. A downgrade to sub-investment grade for the continent’s most-industrialized economy could prompt forced selling by some funds that are prevented by their mandate from owning junk-rated securities.
Finance Minister Pravin Gordhan pledged in his February budget to narrow the fiscal deficit to 2.4 percent of gross domestic product by 2019, from 3.9 percent last year, and limit gross debt to 50.5 percent of GDP in three years by reducing spending and raising taxes. His task is complicated by an economy that is set to expand less than 1 percent this year, the slowest pace since a 2009 recession, according to government and central bank estimates.
“It’s great news,” said Robert Jeffrey, managing director and senior economist at Johannesburg-based advisory service Econometrix. “It will help stabilize the markets. It diminishes the chances of a downgrade in December, but the country will still have to implement measures to fix the economy and boost growth.”
The rand erased an earlier decline of as much as 0.5 percent against the dollar, gaining 0.1 percent after Fitch’s announcement to 14.8965 at 11:57 a.m. in Johannesburg. The local currency weakened after the nation’s statistics agency said GDP contracted an annualized 1.2 percent in the first quarter, more than the 0.1 percent median estimate of 21 economists. Yields on the country’s rand-denominated bonds due in December 2026 fell 6 basis points to 9.04 percent, the lowest since May 2.
Achieving fiscal targets “will be difficult given that GDP growth is likely to underperform,” Fitch said. “Pressures to raise expenditure are rising due to increasing disaffection with poor public-service delivery.”
Fitch sees South Africa’s economic growth slowing to 0.7 percent this year and 1.5 percent in 2017, it said.
Moody’s Investors Service kept its rating of South Africa’s debt at two levels above junk, with a negative outlook, last month, after putting it on review for a downgrade.