South Africa closer to junk status as Fitch cuts outlook

South Africa moved closer to a junk credit rating after Fitch Ratings Ltd. changed the outlook on its assessment to negative from stable and warned continued political instability could result in a downgrade.

The foreign-currency rating and the local-currency rating were kept at BBB-, the lowest investment-grade level and on par with Hungary and Russia. Moody’s Investors Service, which rates the country’s debt two steps above junk with a negative outlook, is publishing the result of its review later today, while S&P Global Ratings, which shares Fitch’s assessment, will publish its report on Dec. 2.

Political risks to the standards of governance and policy-making have increased and will remain high at least until the ruling African National Congress’ leadership election in December next year, Fitch said in an e-mailed statement. Continued political instability that adversely affects standards of governance, the economy or public finances could lead to a downgrade, the company said.

‘Pretty Troubling’

“It does strengthen the narrative that things are pretty troubling right now and that the country really needs to turn things around,” said John Ashbourne, the Africa economist at Capital Economics Ltd. in London. “Moody’s is the most likely to change because it’s a bit of an outlier but I think these agencies all look at the same thing so they all probably look at things similarly.”The rand weakened as much as 0.5 percent before paring the decline to trade 0.2 percent stronger at 14.1175 per dollar by 7:18 p.m. in Johannesburg. Yields on rand-denominated government bonds due December 2026 rose eight basis points to 9.11 percent.

Political turmoil in Africa’s most-industrialized economy, including now-dropped fraud charges against Finance Minister Pravin Gordhan, has overshadowed the state’s efforts to boost investor and business confidence, including recent proposals to stabilize the labor market. The slowest output growth this year since a 2009 recession will complicate Gordhan’s pledge to narrow the budget deficit to 2.5 percent of gross domestic product by 2020, from a projected 3.4 percent this year, and to limit government debt.

Gordhan, 67, who has led efforts to stave off a downgrade while wrangling with President Jacob Zuma over the management of state-owned companies and the national tax agency, said Friday he was “optimistic” about Moody’s review after Fitch left its rating unchanged.

Gordhan was reappointed at the end of last year to the position he held from 2009 until 2014 after Zuma was forced to change his decision to replace former Finance Minister Nhlanhla Nene with a then little-known lawmaker, which sent the rand and bonds plunging.

‘Mixed Messages’

“The in-fighting within the ANC and the government is likely to continue over the next year,” Fitch said. “This will distract policymakers and lead to mixed messages that will continue to undermine the investment climate, thereby constraining GDP growth.”

Fitch forecast the economy will expand by 0.5 percent this year, 1.3 percent in 2017 and 2.1 percent in 2018. If GDP growth fails to recover due to economic policy uncertainty or if the government fails to stabilize its debt ratio it could also lead to a downgrade, Fitch said.

South Africa took note of Fitch’s concerns and was working to address them, Lungisa Fuzile, director-general of the National Treasury, said.

‘Buys Time’

“The fact that we have been able to preserve our investment-grade rating even in the face of all the global and domestic challenges is good enough for now,” Fuzile said by phone. “This buys us more time. I really believe we are on the brink of turning things around.”

While the country had dodged a bullet, the negative outlook meant the next rating move by either Fitch or S&P would be into junk territory, said Christie Viljoen, an economist at KPMG LLP in Cape Town. That would probably increase borrowing costs, making it more difficult for the government to meet its fiscal targets and rein in debt.

“They are sending the same signal as what we have had from S&P since late last year, that the next move is down to a place where you don’t to be,” Viljoen said “We need an effort right form the top of government to get this economy going.”