The ratings agency lowered the long-term foreign currency sovereign credit rating on the Republic of South Africa from ‘BBB-‘ to ‘BB+’ and the long-term local currency rating to ‘BBB-‘ from ‘BBB’.
S&P also lowered the short-term foreign currency rating from ‘A-3’ to ‘B’ and the short-term local currency rating from ‘A-2’ to ‘A-3’, SACCI noted.
S&P Global Ratings rationale
S&P has in their Rationale paragraphs, listed the following reasons for the downgrade:
- The divisions in the ANC-led government that have led to changes in the executive leadership, including the finance minister, have put policy continuity at risk. S&P further believes these delays could lead to fiscal and structural reforms, and potentially erode the trust that had been established between business leaders and labour representative.
- South Africa’s pace of economic growth remains a ratings weakness. It continues to be negative on a per capita GDP basis. While the government has identified important reforms and supply bottlenecks in South Africa’s highly concentrated economy, delivery has been piecemeal in our opinion.
- Contingent liabilities to the state, particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner.
- Ongoing tensions and the potential for further event risk could weigh on investor confidence and exchange rates, and potentially drive increases in real interest rates The increased risk that nonfinancial public enterprises will need further extraordinary government support.
These identified risks that have led us to this point require urgent intervention from the Presidency and the Cabinet.
SACCI urges government to seriously consult as widely as possible on any political decision which may impact the economy of South Africa. Read more…
“The downgrade will result in South Africans capacity to access foreign bonds from international markets as being prohibitively expensive as interest rates will be higher and the knock on effect on the entire economy will be highly corrosive. E.g. higher inflation rate, increase in the cost of food and fuel, effectively affecting the consumer who is currently under financial pressure,” SACCI said in a statement.
Further this will undermine efforts to sustain the growth in social programmes that counteract the effects of poverty and inequality.
The government needs to be very clear and decisive to maintain stability in fiscal policy and provide monetary policy certainty. The changes at executive level, including at ministerial and deputy level, has raised doubt on whether this level of discipline will be maintained.
“We request the government to work with its social partners (labour, business and communities) to ensure that this area of policy uncertainty and stability is not compromised further,” SACCI said.
Energy sector and business confidence
The government needs to address issues of governance and contingent liabilities incurred in the energy sector. This is becoming an issue that the rating agencies have raised which can cause fiscal strain as the impact of commitments may not become fiscally prudent.
SACCI is further concerned about the implications for business confidence in these difficult economic conditions. Read more…
“We urge the government to redouble its efforts to work with business, labour and other key stakeholders in urgently addressing the gaps in governance, address issues of negative perceptions and restore confidence that the ratings agencies require in order to make South Africa a sustainable investment destination,” SACCI concluded.