- S&P Global has downgraded the South African long‐term local currency sovereign credit rating to subinvestment grade BB+ (stable outlook) from BBB‐ and the long‐term foreign currency sovereign credit rating to BB (stable outlook) from BB‐. This followed the earlier foreign currency debt downgrade to junk status in April.
- Moody’s has left its equivalent ratings at Baa3, but placed the ratings on review for downgrade, implying that if no immediate radical remedial action is taken a downgrade will become inevitable.
- The reasons for the ratings deterioration are by now depressingly familiar, with this administration having received consistent warnings since 2012 and failing to act appropriately. The deterioration in the country’s fiscal position has been due to the lack of economic growth impacting on revenues combined with a cabinet that seemingly thinks there are few limits on spending ambitions. With Treasury unable to secure approval for plans to reduce the deficit over the medium term and the continuous promotion of policies that threaten rather help economic growth, the only chance of ratings reprieves this time was that the agencies would weigh the possibility of a radical shift in policy following the ANC elective’s elective conference in December. S&P Global decided that it could not wait given the further deterioration, while Moody’s held off.
- The reprieve by Moody’s gives the South African government one last chance to change its policy direction and address key issues before
universal junk status leads to even more expensive capital, a weaker rand and a further worsening in the growth and fiscal environment.
- Markets had factored in at least one local currency downgrade to subinvestment grade, so reaction is likely to be relatively muted in the
very short term. However, markets will watch developments over the next few weeks very closely. For now the hope must be that no further damage is done before the elective conference and that corrective action occurs immediately thereafter. If no convincing plan is set out and implemented in the February budget then Moody’s will follow, leading to South Africa falling out of Citigroup’s WGBI index. The current actions already imply that the country will soon exit the Barclays Global Aggregate index.
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