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Reprieve for South Africa as S&P leaves credit rating unchanged

South Africa received a reprieve as S&P 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 government 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 as that of Italy and India.

“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 United States president. 

While Africa’s most industrialised 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 stabilise the labour market.

Last chance
“This really is the last chance we’ve got,” Chris Gilmour, an investment analyst at Barclays Wealth and Investment Management in Johannesburg, said before the announcement. 

“Come June, if there is no clear indication that we are on a significantly different upward growth trajectory, then I think we are going into junk.”

The rand strengthened 1.6% to 13.8778 per dollar by 6.50pm in Johannesburg on Friday. Yields on rand-denominated government bonds due December 2026 fell nine basis points to 9.02%. 

Fitch on November 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, 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.

Fraud charges
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 President Jacob Zuma over the management of state-owned companies and the South African Revenue Service. 

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 then little-known MP Des van Rooyen, 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 US 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.”

While South Africa’s local-currency assessment remains two levels above sub-investment grade, 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. – Bloomberg

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