SA’s Economic Standing Still Perilous

On 3 June, ratings agency Standard & Poor’s (S&P) confirmed South Africa’s sovereign international credit rating at BBB- (investment grade), but with a negative outlook. The news came as a relief to many South Africans, although investors are still alarmed by distressing economic forecasts.

The key concerns raised by S&P were low GDP growth and rising political tension. Indeed, the ongoing and high profile political conflicts remain at the core of many of the country’s economic and social woes.

On the positive side, S&P noted improvements in the supply of electricity and the Government’s apparent resolve to reduce fiscal deficits.

Tough Times Ahead

Although SA dodged a rating downgrade to junk status this time, we are certainly not home and dry yet. The current rating assumes that SA will continue to experience broad political stability and macroeconomic policy continuity. Notably, the rating agency highlighted disruptions associated with the upcoming local elections on August 3 this year and the ANC’s elective conference in December 2017.

Moreover, S&P cited the following as key risks to the current rating:

  • Lack of progress on structural reform.
  • Low GDP growth.
  • SA’s reliance on volatile portfolio flows to close the current account gap; and
  • A sizeable Government debt burden.

Looking ahead, S&P has indicated an intention to lower SA’s rating into sub-investment grade this year – or next – if leadership fails to implement the necessary measures to turn the economy around.

Sources: Momentum and STANLIB