On 5 June 2015, Fitch Ratings decided to leave South Africa’s international credit rating unchanged at BBB, with a negative outlook. Some market analysts had expected Fitch to downgrade South Africa to BBB-, but with a neutral outlook.
South Africa’s credit rating was put on negative watch a year-ago (13 June 2014), when Fitch highlighting their concerns about increased labour unrest and slowing growth.
In making the latest decision to leave SA’s credit rating unchanged, Fitch highlighted the following key factors:
- Economic growth potential is weak and well below rates in other emerging markets.
- Inadequate and unstable electricity supply has forced energy utility Eskom to implement rolling power cuts.
- Growth is forecast growth to pick up to 3% in 2017 as energy constraints start to ease somewhat.
- The current account deficit (CAD) has started to narrow, although it is still large.
- Large external financing needs expose the country to shifts in global liquidity at a time when interest rate rises by the US Federal Reserve may trigger market volatility.
- The floating exchange rate, moderate foreign currency debts and overseas assets provide buffers against a 'sudden stop' of capital inflows.
- Net external debt is a little higher than rating peers and rising. However, around 55% of external debt is denominated in rand.
- The government has started to tighten fiscal policy, which is leading to a reduction in the budget deficit, despite weak growth.
- The government’s nominal non-interest expenditure ceiling (which the government has a track record of meeting since 2012) was lowered again but may be difficult to deliver.
- The public wage settlement of 7% in FY15 and CPI+1 in FY16 and FY17 is above the target for the wage bill in the budget, but not critically, and it has avoided a strike.
- Public debt is somewhat higher than rating peers, but should stabilise as a ratio of GDP, if the government meets its fiscal targets. The central government has cash deposits of 4.7% of GDP.
- Inflation has been higher than in many emerging market peers. However, the South African Reserve Bank retains credibility in the markets and its 3%-6% inflation target forms an effective nominal anchor.
- Standards of governance and the business climate are stronger than the 'BBB' median according to World Bank indicators.
- The banking system is well capitalised and has a standalone investment grade rating.
- Deep local capital markets enhance fiscal financing flexibility.
- The structure of government debt is favourable.
- Reforms such as those identified in the National Development Plan (NDP) are necessary to raise GDP growth.
- Implementation of the NDP has been gradual and the goal of raising growth to 5% looks distant.
- Forthcoming wage negotiations in the gold and coal sectors could lead to further debilitating strikes or a sharp increase in wage costs.
- Policy proposals under discussion such as parts of the mineral resources law, visa regulations, a minimum wage, amendments to the labour law and land reform could have an adverse impact on growth, if implemented.
The Negative Outlook reflects the following risk factors:
- Weak GDP growth and a failure to boost growth potential
- Failure to reduce the budget deficit and stabilise the government debt/GDP ratio
- Failure to materially narrow the current account deficit
Overall, although Fitch has kept South Africa’s credit rating on a negative outlook, it has acknowledged government’s efforts to tighten fiscal policy. This combined with the improvement in the current account deficit helped South Africa avoid a credit rating downgrade. It is critical that government adheres to its expenditure ceiling and starts to implement investment friendly economic policy.
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