South Africa Ratings Cut Could Complicate Reserve Bank’s Task

  • Central bank confident will keep investment-grade rating
  • Economic growth shows signs of bottoming, Groepe says

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A cut in South Africa’s credit rating could complicate the Reserve Bank’s challenge of weak growth and accelerating inflation, according to Deputy Governor Francois Groepe.

“A sovereign rating can have an impact on monetary policy because of how it influences the availability and cost of external financing, the yields on domestic debt and, in turn, the performance of the rand,” Groepe said in a speech posted on the central bank’s website on Thursday. Any adverse developments to the conditions under which the nation accesses funding, “would probably further complicate the challenges of weak growth and rising inflation.”

S&P Global Ratings kept South Africa’s credit assessment at BBB-, one level above junk, on June 3, warning that it could cut the nation’s debt evaluation if the economy doesn’t recover. Fitch Ratings Ltd. also maintained its outlook with Moody’s Investors Service keeping Africa’s most-industrialized nation at two levels above non-investment grade. Gross domestic product contracted 1.2 percent in the first quarter and will probably expand at the slowest pace since a 2009 recession this year, according to central bank estimates.

The Reserve Bank is confident that South Africa can retain its investment-grade credit rating and has been monitoring the evolution of the nation’s debt assessment, Groepe said.

“Economic growth, which has been a key concern of the rating agencies, is showing signs of bottoming,” Groepe said. “The 2016 budget has put in place genuine elements of fiscal consolidation.”

While inflation slowed to 6.1 percent in May, it has been outside the Reserve Bank’s 3 percent to 6 percent target band since the start of the year as a weak rand and the worst drought in more than a century pushed up the cost of imports and food. The Monetary Policy Committee left the benchmark repurchase rate unchanged at 7 percent last month after raising it four times since July and will announce its next interest-rate decision on July 21.

“Monetary accommodation has been partly removed, but without moving to an
outright restrictive stance,” Groepe said.

The rand weakened 0.2 percent to 14.8143 per dollar as of 1:26 p.m. in Johannesburg. Yields on rand-denominated government bonds rose four basis points to 8.81 percent.

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