South Africa was spared a credit-rating downgrade for the second time this month Wednesday, helping shore up investor sentiment following a worse-than-expected economic slump in the first quarter.

Fitch Ratings Ltd. retained a stable outlook on South Africa’s BBB- long-term foreign currency rating, the lowest investment-grade level, saying concerns about slow growth, significant fiscal and external deficits and high debt levels were balanced by strong policy institutions, deep local capital markets and a favorable government debt structure. S&P Global Ratings affirmed its BBB- level with a negative outlook on June 3, while warning it could cut the nation to junk unless measures were taken to bolster growth. S&P is scheduled to review its rating again in December while Fitch hasn’t yet indicated when it will do its next assessment.

The Fitch announcement came just minutes after the national statistics office said gross domestic product contracted an annualized 1.2 percent in the first quarter, compared with a 0.4 percent expansion in the previous three months. The median of 21 economist estimates compiled by Bloomberg was for a 0.1 percent contraction.

“We didn’t expect Fitch to downgrade us, but we expected an outlook change to negative,” Johann Els, an economist at Cape Town-based Old Mutual Investment Group, said by phone. “That is a positive surprise. I can’t see them downgrading in December.”

The rand gained against the dollar and bonds advanced after the Fitch announcement. The currency strengthened 1.3 percent to 14.7168 per dollar by 2:08 p.m. in Johannesburg, erasing a decline of as much as 0.5 percent after the release of the GDP data. Yields on benchmark rand bonds due December 2026 dropped six basis points to 9.04 percent.

A downgrade to sub-investment grade for the continent’s most-industrialized economy could prompt forced selling by some funds that are prevented by their mandate from owning junk-rated securities.

Budget deficit
Finance Minister Pravin Gordhan pledged in his February budget to narrow the fiscal deficit to 2.4 percent of gross domestic product by 2019, from 3.9 percent last year, and limit gross debt to 50.5 percent of GDP in three years by reducing spending and raising taxes. His task is complicated by an economy that is set to expand just 0.6 percent this year, the slowest pace since a 2009 recession, according to the central bank.

The World Bank cut its 2016 growth forecast for South Africa to 0.6 percent from 0.8 percent on Tuesday, saying low business confidence and political tensions are slowing investment growth. Fitch projects the economy will grow 0.7 percent this year and 1.5 percent in 2017.

Achieving fiscal targets “will be difficult given that GDP growth is likely to underperform,” the ratings company said. “Pressures to raise expenditure are rising due to increasing disaffection with poor public-service delivery.”

Farming output contracted by an annualized 6.5 percent in the three months through March, the fifth consecutive quarter of decline, while mining shrunk by an annualized 18.1 percent, the statistics office said in a report released in Pretoria, the capital. The transport industry entered a recession in the three months through March and declined by an annualized 2.7 percent.

“The news of the negative GDP print is tempered somewhat by Fitch’s almost simultaneous affirmation of South Africa’s investment-grade rating,” Razia Khan, head of Africa macro research at Standard Chartered in London, said in an e-mailed note. “Despite this seeming reprieve, there will be broad realization that an improved growth performance is necessary for South Africa to retain investment grade.”



Source – Bloomberg

Additional Reading?

Request Free Copy