South Africa Rating Cut to One Level Above Junk by Fitch

  • Country's sovereign credit rating lowered one step to BBB-
  • Economy forecast to grow at slowest pace since 2009 recession

South Africa’s credit rating was cut one level to BBB- by Fitch Ratings Ltd. as economic growth slows, bringing the country closer to a junk rating and in line with the assessment of Standard & Poor’s.

The foreign-currency rating was reduced from BBB to the lowest investment grade, the company said in an e-mailed statement on Friday. The outlook on the rating was changed to stable from negative. Standard & Poor’s changed the outlook on its BBB- rating to negative from stable earlier in the day. Fitch’s second downgrade for South Africa in three years puts its evaluation on a par with India and Turkey.

“GDP growth performance and estimates of growth potential have weakened further,” Fitch said in the statement. “Despite the ambitious structural reforms in the National Development Plan, various policies have weakened business confidence and South Africa’s position in the World Bank’s Doing Business rankings has fallen.”

South Africa’s economy, the second-largest on the continent, after Nigeria, narrowly avoided a recession in the third quarter, posting 0.7 percent annualized growth after a contraction in the previous three months as electricity shortages, low global demand and falling metal prices stifled output. The central bank projects gross domestic product will expand 1.4 percent this year, which would be the slowest pace since a recession in 2009.

Junk Risk

“The risk of a junk rating is not insignificant,” Colen Garrow, chief economist at Lefika Securities in Johannesburg, said by phone Friday after the Fitch decision. “There are big question marks over GDP growth and I can’t say we have anything in sight that will elevate GDP growth to significantly higher levels.”

Finance Minister Nhlanhla Nene cut back tax-revenue projections in his mid-term budget in October because of slowing growth forecasts, reducing the government’s ability to rein in the fiscal deficit as quickly as targeted. The cost of insuring against a default by the South African government for five years through credit-default swaps has climbed almost 70 points since the start of June to 274 on Friday.

Twelve of 13 economists surveyed by Bloomberg forecast that Fitch would cut its rating.

“South Africa is clinging on to its investment grade rating by its fingernails,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said by e-mail. “In some respects it’s fortunate not to have been junked already.”

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