/ 10 June 2016

SA granted credit rating reprieve but all is not rosy

Sa Granted Credit Rating Reprieve But All Is Not Rosy

Fitch, the last of the three ratings agencies to pronounce on South Africa’s creditworthiness, granted the country a reprieve on Wednesday. But the good news was overshadowed by economic growth figures that came out worse than expected. 
Economic growth shrank by 1.2% during the first quarter of 2016, according to Statistics South Africa. 

The slowdown was worse than the market had anticipated and was driven by stark declines in the

mining sector, which decreased by 18.1% as a result of the lower production of platinum group metals and iron ore. 

The agricultural sector was another contributor to poor growth, falling by 6.5%. The country has been battling an ongoing drought and, according to Stats SA, the sector has contracted for five consecutive quarters.

Nedbank said in a research note that the outlook remained bleak. Agriculture was not expected to bounce back, given the “lingering impact of the drought”. 

Weak global demand, the commodity price slump and rising production costs, among others, were likely to continue to weigh on both the mining and manufacturing sectors, it said. 

This would offset any competitive advantages gained by a weaker rand. As a result it expected more cutbacks in investment and jobs by private firms. 

Weak economic growth was flagged by Fitch as one of the reasons for its BBB-credit rating. But it opted not to downgrade South Africa further and kept its outlook at stable. 

The decision to keep the outlook at stable came despite expectations that it would move the outlook to negative. 

Fitch warned, however, “political risk” had increased since its previous ratings decision in December. 

The reshuffle of finance ministers and the tensions being experienced by Finance Minister Pravin Gordhan and other arms of government “have raised questions about the commitment of the government to sustained fiscal consolidation and prudent governance of state-owned enterprises”.

Fitch said these risks are not out of line with South Africa’s peer countries with a similar rating. 

Although the government remained committed to fiscal objectives set out in the February budget, political tensions “increase risks to progress on fiscal consolidation and growth-enhancing measures, and raise the chances of policy missteps,” Fitch said.

The agency warned the trend in economic growth remained lower than that of South Africa’s peers — at an average of 2.2% over the past five years compared with 3.3% of its peer countries. 

“Growth is held back by constrained electricity supply, concerns about the deteriorating investment climate and fractious labour relations,” Fitch said. 

Although S&P Global and now Fitch have upheld South Africa’s investment-grade credit ratings, the trajectory for economic growth “is very worrisome and, without structural reform, could well trigger a downgrade at the end of the year”, said First National Bank economist Jason Muscat.