South Africa Gets S&P Reprieve as Local Debt Averts Junk

JOHANNESBURG (Capital Markets in Africa) – S&P Global Ratings left its assessment of South Africa’s foreign-currency debt at the highest junk level and its rand bonds at the lowest investment grade, granting the country a reprieve after a downgrade in April.

The foreign-currency rating was affirmed at BB+, S&P said in a statement Friday. The assessment on rand debt, which comprises about 90 percent of the country’s portfolio, was maintained at BBB-. The outlook on both was kept at negative.

Fitch Ratings Ltd. and S&P cut their assessments of South Africa’s foreign-currency debt to the junk in early April after a midnight cabinet shuffle in which President Jacob Zuma replaced Pravin Gordhan as finance minister with Malusi Gigaba, the former home affairs minister. The companies cited fears about policy uncertainty in their announcements. The rand lost as much as 11 percent against the dollar after the president called Gordhan back from meetings with investors in the U.K. and subsequently dismissed him.

The move sparked street demonstrations pushing for Zuma’s removal from office while opposition parties tabled a motion of no confidence against him in parliament. The country’s High Court last month ordered Zuma to explain his cabinet changes. The ruling African National Congress’s national executive committee debated and rejected the option of removing Zuma at a meeting that ended May 28.

The ratings “are constrained by the weak pace of economic growth and limited fiscal flexibility, with a high stock of government debt,” S&P said. The outlook “reflects our view that political risks will remain elevated this year, which could undermine economic growth and fiscal outcomes more than we currently project,” it said.

Growth Forecasts
Fitch on Thursday affirmed its ratings at the highest non-investment grade. Moody’s Investors Service is still due to make its announcement.

“The Treasury is on a good path in terms of fiscal consolidation, so they need to stick to it,” Gardner Rusike, an associate director at S&P, said by phone. “The biggest challenge to that fiscal-consolidation oath is the economic performance, which is remaining slower.”

Africa’s most-industrialized economy expanded by 0.3 percent in 2016, the slowest pace since a 2009 recession. The central bank forecasts growth of 1 percent this year, matching S&P’s estimate.

The government agrees with S&P that the pace of economic growth is too slow, the National Treasury said.

The “focus is to safeguard confidence and reclaim the investment-grade ratings,” the Treasury said in an emailed statement.

While the rand has regained some ground and strengthened more than 7 percent against the dollar this year, it remains the most volatile among major and emerging-markets currencies tracked by Bloomberg.

The rand strengthened 0.7 percent to 12.8015 per dollar by 6:02 p.m. in Johannesburg on Friday. Yields on rand-denominated government bonds due December 2026 fell 10 basis points to 8.44 percent, the lowest since March 24.

South Africa had enjoyed investment-grade standing at all three major ratings companies since at least 2000.

The election of new ANC leaders in December could support business confidence, Rusike said.

“There is a way out of non-investment grade, but I think its going to take some time,” he said. “The immediate concern for South Africa would be getting a stable outlook at the current rating level before we can talk about getting investment grade.”

Source: Bloomberg Business News