South Africa received a reprieve as S&P Global Ratings left its assessment of the nation’s foreign-currency debt unchanged at one level above junk, while lowering its local-currency rating and warning that political interference in fiscal policy could lead to a downgrade.
The foreign-currency rating was kept at BBB-, S&P said in a statement Friday, and the outlook was left at negative. The local-currency assessment was cut one level to BBB, the second-lowest investment grade. The affirmation keeps South Africa’s foreign-currency debt on the same level by S&P as that of Italy and India, and at investment grade at all three major credit-rating companies.
“Political events have distracted from growth-enhancing reforms, while low GDP growth continues to affect South Africa’s economic and fiscal performance and overall debt stock,” S&P said. “Ongoing continued tensions and the potential for event risk could weigh on investor confidence and exchange rates, and potentially affect government policy direction.”
Keeping the foreign-currency rating at investment grade may boost sentiment and support the rand after a year of domestic political upheaval and emerging-market uncertainty fueled by Brexit and the election of Donald Trump as U.S. president. While Africa’s most-industrialized economy is forecast to expand at the slowest pace since a 2009 recession this year, the growth outlook has improved since the previous rating review six months ago and the government has announced proposals to stabilize the labor market.
The National Treasury recognizes the country’s weaknesses and is committed to structural reforms to boost economic growth, which should help ward off a downgrade at the next round of assessments, it said in a statement. Policy continues despite “rising political noise,” the Treasury said.
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“We can celebrate for a few hours, come Monday we must roll up our sleeves and get down to work and do what is necessary to make sure that come six months’ time we will not be panicking,” Lungisa Fuzile, the head of the Treasury, said by phone.
The rand extended gains after the announcement, strengthening 2.3 percent, the most of 31 major and emerging-market currencies tracked by Bloomberg, to 13.7957 per dollar by 8 p.m. in Johannesburg on Friday.
South African President Jacob Zuma said the fact that the country had maintained its rating status reflected unity between the government, business and labor.
“Working together as government, business and labor we can overcome the current economic challenges and we must continue working hard and creatively to reignite growth so that jobs can be created for our people,” he said in a statement Saturday.
Fitch Ratings Ltd. on Nov. 25 revised the outlook on its BBB- rating to negative from stable and warned that continued political instability could result in a downgrade. Later the same day, Moody’s Investors Service, which rates South Africa’s foreign-currency debt at the second-lowest investment grade level with a negative outlook, said in a credit opinion that political infighting, which leads to policy uncertainty and slows structural reforms, could lead to a cut.
“This is the final warning, if we continue moving sideways, we risk being downgraded,” Thabi Leoka, an economist at Argon Asset Management in Johannesburg, said by phone. “If we turn the economy around in a sustained way, that will appease the ratings agencies.”
Fraud charges against Finance Minister Pravin Gordhan, which dented investor confidence and raised political risk, were abandoned in October. Gordhan, 67, has led efforts to stave off a junk rating while wrangling with Zuma over the management of state-owned companies and the national tax agency. He 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 caused the rand and government bonds to plunge.
“We could lower the ratings if GDP growth or the fiscal trajectory does not improve in line with our current expectations, for example if South Africa enters a recession in 2017 or wealth levels continue to decline in U.S. dollar terms,”’ S&P said. “We could also lower the ratings if we believed that institutions had become weaker due to political interference affecting the government’s policy framework. ”
Gordhan has pledged to narrow the budget deficit to 2.5 percent of GDP by 2020 from an estimated 3.4 percent this fiscal year, and to limit government debt to 53 percent of GDP in two years.
While South Africa’s local-currency assessment remains two levels above sub-investment grade with S&P, it is the rating used for inclusion in global benchmark indexes such as Citigroup’s World Government Bond Index, meaning money managers could be forced to sell the country’s assets if it falls to junk.