Ratings agencies Fitch and Standard & Poor’s (S&P) both kept their rating of South Africa unchanged late on Friday, 12 December, despite analysts predicting they would opt for downgrades on the back of a nationwide power crunch and persistently low economic growth.
The government recognised the need to steer South Africa’s economic growth trajectory on to a more robust course, the National Treasury said in a statement in response to the ratings affirmations, released on 13 December. “Important structural reforms are under way in major economic sectors that will boost the economy’s growth.
“The Medium Term Strategic Framework (MTSF) sets out the government’s actions over the next five years to achieve such a goal. The MTSF plans target a thriving business sector and a strong civil society. As a result, growth enhancing initiatives and programmes aimed at improving the competitiveness of the renewable energy sector and sustaining job creation are prioritised.”
It said the 2014 Medium Term Budget Policy Statement echoed the National Development Plan’s agenda to increase private and public sector partnerships, required for more robust economic growth.
The government would keep to the expenditure ceiling set out in the Medium Term Budget Policy Statement and was committed to reducing the budget deficit and stabilising government debt levels in the medium term.
Before the announcements on Friday, the rand plunged to a six-year low against the dollar of R11.72 to the dollar; the JSE hit seven-week lows as markets expected the worst.
But just before midnight, Fitch said it would not downgrade South Africa; however, it kept a “negative outlook”. It warned that economic growth “has been persistently weak relative to expectations”, partly because of electricity supply constraints at Eskom and strikes in the platinum and manufacturing sectors.
Similarly, earlier in the day, S&P said it would not downgrade South Africa’s rating – it did so already this year – although it was also concerned about electricity load shedding and low growth.
“Fitch has revised down its gross domestic product (GDP) growth forecast to 1.5% in 2014 owing to adverse effects from strikes in the platinum and manufacturing sectors, electricity supply constraints, declining terms of trade, weak confidence and subdued global growth,” the agency said in its Friday statement.
“We have also revised down forecasts for 2015 to 2.5% and 2016 to 3%. The authorities now estimate potential growth at 2.5% to 3%, compared with 3.5% pre- global financial crisis.”
S&P was less optimistic, putting expectations for GDP growth at 1.4%; but it predicted an improvement to 2.5% in 2015 and 2.9% in 2016, “based on fewer and shorter strikes, and increases in electricity supply and consumer demand”.
The agency pointed to industrial action as a major dampener on growth, particularly the drawn-out strike in the platinum sector earlier this year. It was, however, confident that Finance Minister Nhlanhla Nene was controlling government expenditure.
“The Medium-Term Budget Policy Statement in October 2014 signalled a tightening in fiscal policy despite weak growth. It recognised that much of the budget deficit is structural and the government can no longer delay consolidation until a cyclical recovery. The size of the tightening at 0.7% of GDP by 2016/17. is moderate, but should be enough to stabilise the government debt/GDP ratio,” Fitch said.
It was also confident of the country’s private sector, saying: “Standards of governance and the business climate are stronger than the BBB median according to World Bank indicators. The banking system is well capitalised and has a standalone investment grade rating. Deep local capital markets enhance fiscal financing flexibility.”
S&P affirmed its long- and short-term foreign currency sovereign credit ratings on South Africa at BBB-/A-3. It also affirmed its BBB+/A-2 local currency ratings and zaAAA/zaA-1 South Africa national scale ratings.
“The outlook remains stable, reflecting our view that a slight rebound in GDP growth in 2015-2017 will help contain South Africa’s fiscal and external balances within our current expectations,” the agency said on 12 December.
Fitch Ratings affirmed South Africa’s long-term foreign and local currency Issuer Default Ratings (IDR) at BBB and BBB+, respectively.
“The outlooks are negative,” it said. The issue ratings on the senior unsecured foreign and local currency bonds were been affirmed at BBB and BBB+, respectively. The country ceiling was affirmed at A- and the short-term foreign currency IDR at F3.