S. Africa Gets Reprieve From Junk as S&P Keeps Rating Unchanged

  • Negative outlook signals continued risk of credit downgrade
  • Gross domestic product to expand 0.6% in this year, S&P says

South Africa got a reprieve from a junk credit rating as S&P Global Ratings warned it could cut the nation’s debt assessment if the economy doesn’t recover.

The foreign-currency rating was kept at BBB-, one level above junk, and the local-currency rating was affirmed at BBB+, S&P said in a statement on Friday. The outlook on the rating was kept at negative. The rating affirmation keeps South Africa on the same level as India and Italy.

“South Africa’s weak economic growth, relative to that of peers in similar wealth categories, continues to be hurt by a combination of factors,” S&P said. The negative outlook signals “that we could lower our ratings on South Africa this year or next if policy measures do not turn the economy around,” it said.

While the nation maintained its investment grade for now, economic growth forecast at the slowest pace since the 2009 recession will keep pressure on the rating. A downgrade to junk for Africa’s most-industrialized economy could prompt forced selling by some funds that are prevented by their mandate from owning junk-rated securities.

“It doesn’t mean we are out the woods yet,” Johan Rossouw, group economist at Vunani Securities Ltd., said by phone from Cape Town. “They probably took a wait-and-see approach with regards to the mini-budget coming up in October and they will probably then reassess.”

Growth Reforms

While the Treasury is “less good” at pushing through reforms that would stimulate growth, it’s good at collecting revenue and controlling spending, Ravi Bhatia, director and lead analyst at S&P, said by phone from London. Finance Minister Pravin Gordhan pledged in his February budget to narrow the fiscal deficit to 2.4 percent of GDP by 2019, from 3.9 percent last year, and limit gross debt to 50.5 percent of GDP in three years by reining in spending and increasing taxes.

S&P cut its 2016 growth forecast for South Africa’s economy to 0.6 percent, from 0.8 percent published in April, saying cyclical factors such as subdued mine and factory output and a drought, as well as structural constraints, are negative for output.

“Government is aware that the next six months are critical and there is a need to step up the implementation” of measures to boost the economy, the Treasury said in an e-mailed statement. “The benefit of this decision is that South Africa is given more time to demonstrate further concrete implementation of reforms that are underway.”

Gordhan has met with business and labor leaders and investors since February to come up with measures to boost growth and improve sentiment. Gordhan was reappointed in December to the position he held from 2009 until 2014 after business and ruling party leaders forced President Jacob Zuma to backtrack on a decision to replace Nhlanhla Nene as finance minister with a little-known lawmaker.

“Expectations of still-weak growth and concerns about political tensions mean that the risk of a further downgrade has not gone away,” Razia Khan, head of Africa economic research at Standard Chartered in London, said in an e-mailed note. “Unless the authorities demonstrate a more certain commitment to structural reforms, the risk of the loss of investment grade in December remains.”

The rand gained 3.2 percent to 15.0930 per dollar as of 7:49 p.m. in Johannesburg on Friday. Yields on rand-denominated government bonds due December 2016 fell 14 basis points to 9.17 percent.

Moody’s Investors Service kept its assessment of the country’s creditworthiness at two levels above junk last month, after putting it on review for a downgrade. Fitch Ratings Ltd. has reviewed its BBB- rating, on which it has a stable outlook, in recent weeks and has not said when it will publish the results of its analysis.

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