S&P Warns South Africa on Twin Deficits as It Affirms Rating

Standard & Poor’s kept South Africa’s credit rating at BBB, while warning that a deterioration in the nation’s current-account and fiscal deficits may prompt a second downgrade.

While the government is “ensuring broad and largely pragmatic policy continuity,” the nation’s ratings are constrained by a wide current-account deficit that makes it vulnerable to capital outflows, S&P said in a statement today.

S&P retained a negative outlook on the debt rating, which is the second-lowest investment-grade level and on par with Brazil, Russia and Colombia. That reflects the fact that the country’s lackluster economic performance, external imbalances and labor tensions could affect the macroeconomic policy framework, it said.

“We could lower the ratings if external imbalances continue to increase, or funding for South Africa’s current-account or fiscal deficits becomes less available,” S&P said.

The statement comes two days after Fitch Ratings maintained South Africa’s rating at BBB with a stable outlook. Moody’s Investors Service rates the debt at Baa1, which is one level above Fitch and S&P, with a negative outlook.

The S&P action “removes one of the risks we think could have weighed on South Africa’s currency and asset markets heading into 2014,” Peter Worthington, an economist at Johannesburg-based Barclays Africa Group Ltd.’s investment banking unit, said in an e-mailed note to clients today. “We do not now see any near-term risk of rating changes in the absence of some major unforeseen shocks.”

Rand Weakens

The rand fell 0.5 percent to 10.4408 against the dollar as of 11:54 a.m. in Johannesburg, taking its decline this year to 19 percent, the worst performer of 16 major currencies tracked by Bloomberg.

The gap in the current account, the broadest measure in the trade of goods and services, widened to 6.8 percent of gross domestic product in the third quarter from 5.9 percent in the previous three months. South Africa relies mainly on foreign investment into stocks and bonds to fund the shortfall, inflows that have slumped in the past six months as the U.S. Federal Reserve curbs its monetary stimulus program.

S&P “did not take adequate account” of the economic progress made since the rating was lowered in October last year, the National Treasury said in an e-mailed statement today.

Labor Tension

South Africa still faces the risk of a downgrade next year if the political environment deteriorates, said Christie Viljoen, an economist at NKC Independent Economists, based in Paarl, near Cape Town.

Labor tension has intensified since last year with strikes disrupting output at industries from mining to carmaking. The National Union of Metalworkers of South Africa, the nation’s biggest labor group, is due to announce today whether it will withdraw its support for the ruling African National Congress in an election that’s due to take place by July.

“Because S&P focuses on the political situation as well, we could see another downgrade from them next year,” Viljoen said. “S&P will report again soon after the election and the political climate can deteriorate.”

Before it's here, it's on the Bloomberg Terminal.