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South Africa should not underestimate ratings downgrades risk

6 July 2016 Comments (0) Africa, Business, Latest Updates from Reuters

JOHANNESBURG (Reuters) – South Africa should not underestimate the risk of credit rating downgrades this year if the ailing economy does not improve, Central Bank Deputy Governor Daniel Mminele said on Wednesday.

Pretoria dodged ratings downgrades from Moody’s, S&P Global Ratings and Fitch earlier this year, giving policymakers time to act to strengthen the economy of Africa’s most industrialised country before the next round of reviews due by December.

Analysts have said South Africa’s economy faces hurdles and that the threat of “junk” status is looming.

“During May and June, South Africa received confirmations of unchanged credit ratings from all three major credit rating agencies,” Mminele said in a speech posted on the bank’s website.

“These confirmations, however, came with a very clear message: further improvements in the macroeconomic fundamentals are required.”

He said this suggested that “in the absence of demonstrable progress being made as part of a concerted effort involving all social partners, the risk of downgrades during the next reviews towards the end of this year should not be underestimated.”

The bank expects South Africa’s economy to grow by 0.6 percent this year and a modest recovery is seen over the next two years, but Mminele said the assumptions underlying the estimate had not factored in any possible spillover effects from Britain’s vote to leave the European Union.

“The UK’s present and future are now riddled with uncertainty, naturally accompanied by a flight to safety,” Mminele said.

“For South Africa, the implications through direct trade links are expected to be relatively minimal. In 2015, the UK accounted for only 4 percent of our total merchandise exports.”

Mminele, however, said financial linkages were far larger relative to the size of the South African economy.

For example, the value of South African assets owned by UK corporates and investment funds amounted to 46.5 percent of South Africa’s gross domestic product (GDP) at the end of 2014.

In turn, South African investors owned UK assets amounting to 33.2 percent of the African country’s GDP.

“In addition, both foreign direct investment and portfolio flows are also significant. This means that South Africa could very well be affected by the realization of tail risks emanating from asset liquidation by UK corporates and investment funds,” Mminele said.

 

(Reporting by Olivia Kumwenda-Mtambo; Editing by James Macharia)

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Fitch may keep South Africa rating but cut outlook, analysts say

6 June 2016 Comments (0) Africa, Business, Latest Updates from Reuters

JOHANNESBURG (Reuters) – Ratings agency Fitch is likely to affirm South Africa’s investment grade credit rating this week but may lower its outlook to negative, analysts said, as Africa’s most industrialised economy grapples with slow growth.

South Africa has dodged downgrades from S&P Global Ratings and Moody’s, taking some pressure off President Jacob Zuma ahead of elections in August and giving policymakers more time to implement reforms to boost GDP growth.

Fitch, which rates South Africa one step above speculative grade with a stable outlook, has not said when it will publish its review. The Treasury has said it expects the review on June 8.

“We expect Fitch to affirm the rating at BBB- but change the outlook to negative, bringing them in line with S&P,” Rand Merchant Bank analyst John Cairns said.

“The announcement will be a small negative and will not fully offset the positive news from S&P.”

Three other analysts Reuters spoke to expected much the same result.

S&P said on Friday it was sticking to its BBB- rating on South Africa, one notch above non-investment grade. But it warned that its negative outlook reflected the potential adverse consequences of low GDP growth. Last month, Moody’s kept its rating at Baa2.

The rand and government bonds jumped after the S&P review, with the currency trading 0.3 percent firmer, while the benchmark bond due in 2026 and the country’s dollar-denominated bonds firmed.

Rating agencies had warned of possible cuts to South Africa’s credit standing after Zuma rattled investors by changing finance ministers twice in less than a week in December, triggering a cross-asset selloff.

In its last review, released on Dec. 4, before Zuma swapped his finance ministers, Fitch had said it expected South Africa’s economy to grow by 1.7 percent this year.

But the economy has taken a turn for the worse after scandals surrounding Zuma and a severe drought that has hit agricultural output and worsened inflation.

The Treasury currently expects GDP growth of less than 1 percent this year.

Zuma has faced calls to resign following a Constitutional Court ruling in March that he had erred by refusing to refund the state for renovation work on his house paid for by the taxpayer.

“There is always a chance that they (Fitch) change the ‘stable’ outlook on their BBB- rating to ‘negative’, although this is not a given just yet,” said Standard Chartered’s head of Africa research, Razia Khan.

“Having just downgraded South Africa and assigned the stable outlook to the rating last December, they too could give it another six months or longer before changing the outlook.”

Analysts say a downgrade to “junk” status could be on the cards later this year if policy measures did not turn around an ailing economy.

“Fitch’s decision to hold the rating outlook at stable or to adjust the outlook to negative has valid arguments on both sides, and will therefore be a very close call,” NKC African Economics’ Hanns Spangenberg said.

“However, given the deterioration in South Africa’s economic growth outlook, as well as an uptick in political risk over the last few months, our view is that the correct decision for Fitch would be to adjust South Africa’s rating outlook to negative.”

 

(By Olivia Kumwenda-Mtambo. Editing by James Macharia and Hugh Lawson)

 

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Moody’s to visit South Africa next week to decide on ratings

9 March 2016 Comments (0) Africa, Business, Latest Updates from Reuters

JOHANNESBURG (Reuters) – Ratings firm Moody’s will visit South Africa next week to decide whether to downgrade the credit status of Africa’s most industrialised economy to just one notch above sub-investment grade, the Treasury said on Wednesday.

South Africa’s Finance Minister Pravin Gordhan told local station Radio 702 that Moody’s informed him of their decision during his stop in London on an overseas roadshow to meet with investors and convince them the economy could be turned around.

“They will be in South Africa and meet with various stakeholders and get relevant information that will influence them either not to downgrade us or not to downgrade us,” Gordhan said.

The Treasury said in a statement that the “review visit will primarily serve to either affirm the current ratings or downgrade them.”

Gordhan is battling to boost South Africa’s growth and to persuade ratings agencies not to cut the country’s credit rating to junk following his appointment last December.

Late on Tuesday, Moody’s said it was placing South Africa’s Baa2 ratings on review for downgrade, citing the economy’s weak growth prospects and worsening fiscal position. [nFWN16G023]

“The review will allow Moody’s to assess to what extent government policy can stabilize the economy and restore fiscal strength,” the agency said in a statement.

Moody’s put South Africa’s Baa2 credit rating on a negative outlook in December, and is the only agency that does not have South Africa a step away from junk status.

 

(Reporting by Mfuneko Toyana; Editing by James Macharia)

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South Africa’s economy slows further, ratings eyed

1 March 2016 Comments (0) Africa, Business, Latest Updates from Reuters

PRETORIA (Reuters) – Disappointing economic growth in South Africa at the end of 2015 is likely to heighten fears its credit rating will be cut to “junk” and further unnerve investors concerned about President Jacob Zuma’s handling of the economy.

Data from Statistics South Africa on Tuesday showed the continent’s most industrialised economy expanded 0.6 percent in the final quarter, slowing slightly from the previous three months as the agricultural and manufacturing sectors shrank. Economists polled by Reuters had expected a rise of 0.8 percent.

“With all expectations that 2016 will be weaker still, this signals decelerating growth momentum in South Africa for three consecutive years, highlighting some of the long-standing concerns of the ratings agencies,” said Standard Chartered’s head of Africa research, Razia Khan.

The rand nevertheless rose 1 percent against the dollar, tracking other emerging market currencies higher as uncertainty over the pace of further U.S. interest rate hikes tempers the dollar’s momentum.

Credit rating agencies have said South Africa is at risk of a downgrade that could take it below investment grade.

The Treasury has warned such a move could trigger a sharp reversal of foreign capital flows on which South Africa relies to finance its huge current account deficit and precipitate a recession.

Fitch and Standard & Poor’s currently rate South Africa BBB-, one notch above “junk”, while Moody’s assigns a slightly higher Baa2 grade.

On a year-on-year basis, the economy grew 0.6 percent from 1 percent in October to December compared with a Reuters poll forecast of 0.4 percent.

More sluggishness is expected in 2016 as a severe drought persists and global demand for South African exports including gold and other metals remains depressed.

The government forecasts growth of 0.9 percent this year compared with an estimated 1.3 percent in 2015, which would be the lowest rate of expansion since South Africa emerged from a recession in 2009.

 

NERVOUS

Investors are also nervous about economic policymaking after Zuma’s sudden firing in December of finance minister Nhlanhla Nene in favour of a relatively unknown lawmaker precipitated a plunge in the rand and other South African assets.

To halt the sell-off, Zuma brought back Pravin Gordhan as his third finance minister in a week, but recent media reports have suggested a rift between the president and Gordhan, who won investors’ respect during a previous stint in the job.

Gordhan outlined an austere budget last week that was aimed at avoiding credit rating downgrades but which failed to reassure investors.

Zuma, who faces his second no-confidence vote in a year on Tuesday over what the opposition Democratic Alliance called his reckless handling of the economy, has denied he and Gordhan are at war.

Highlighting the economy’s weakness, separate data on Tuesday showed new vehicle sales fell by 8.1 percent year-on-year in February, their third consecutive monthly contraction.

Electricity prices could also drag on growth after the energy regulator allowed state-owned power firm Eskom to raise tariffs by 9.4 percent in the 2016/17.

“These data make it less likely that the Reserve Bank will follow up January’s 50 basis points interest rate hike with another rate rise this month, despite the deteriorating inflation outlook,” Capital Economics analysts said in a note.

The South African Reserve Bank has been hiking interest rates to tame rising inflation, despite weak growth.

The bank will announce its second interest rate decision of 2016 on March 17.

 

(By Olivia Kumwenda-Mtambo. Editing by James Macharia and Catherine Evans)

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South Africa announces austere budget to trim deficit, avoid downgrades

24 February 2016 Comments (0) Africa, Latest Updates from Reuters, Politics

CAPE TOWN (Reuters) – South Africa announced an austere budget on Wednesday aimed at avoiding cuts in its credit ratings, and vowed to focus spending on priority areas after weak economic growth reduced its revenue.

The measures may appease ratings agencies, which have said they might lower South Africa to sub-investment grade after President Jacob Zuma changed finance ministers twice in less than a week in December, casting doubt over Pretoria’s commitment to prudent fiscal policy.

Still, the package of spending cuts, civil service job freezes and moderate tax hikes on property sales, fuel, alcohol and capital gains may not go down well with voters ahead of municipal elections this year in which the ruling African National Congress faces a stiff challenge from the opposition.

“We cannot spend money we do not have. We cannot borrow beyond our ability to repay. Until we can ignite growth and generate more revenue, we have to be tough on ourselves,” Finance Minister Pravin Gordhan told parliament.

The tax hikes should help raise an additional 18.1 billion rand in revenue in 2016/17, he said.

Asked if the budget was enough to stave off ratings downgrades, Gordhan told ENCA news channel: “That’s what I hope.”

He said the economy may expand just 0.9 percent in 2016, down from a previous forecast of 1.7 percent and compared with estimated growth estimate of 1.3 percent in 2015.

It would be the lowest rate of growth since South Africa emerged from recession in 2009 and would reflect the impact of a severe drought and a sluggish global economy.

Growth has now fallen behind the rate of population increase, resulting in declining per capita incomes, the National Treasury said in a budget statement outlining spending plans for the next three years.

“In other words, the average South African is becoming poorer,” it said.

The rand extended losses over the lower growth forecast, trading 2.5 percent weaker to the dollar on the day.

“I would say the rand weakened so much immediately after the budget was released primarily because of the lack of sufficient reforms to tackle South Africa’s economic problems,” London-based EMEA analyst at 4cast Rajiev Rajkumar said.

“Whilst the lower projections for the budget deficit are a plus, ratings agencies previously said the country’s weak economy could be cause for further ratings downgrades to junk status.”

The cost of insuring exposure to South African debt via credit default swaps rose 17 basis points (bps), indicating investors’ disappointment with Gordhan’s budget.

 

NARROWER DEFICIT

Despite weaker growth, the government would still aim to reduce its budget deficit to 3.2 percent of GDP in the next fiscal year from 3.9 percent in the current 2015/16 period by tightening spending.

Fitch and Standard and Poor’s have South Africa on BBB-, just a step into investment grade. Any further cut would label them as junk status. The third main ratings agency, Moody’s, rates South Africa at Baa2, two notches above junk.

Moody’s said last week the drought risked tipping an already weak economy into recession as rising agricultural imports feed into rising inflation.

The Treasury said a credit downgrade to sub-investment grade, or “junk” status, could trigger a sharp reversal of capital flows and precipitate recession.

“In such an event, aggressive austerity measures would likely be required to restore public finances to a sustainable position,” it said.

The Treasury said it had cut government departments’ budgets for non-essential services, would borrow $4.5 billion from global markets over the next three years, and seek a minority equity partner after merging two of its state-owned airlines.

 

(By Stella Mapenzauswa and Olivia Kumwenda-Mtambo. Additional reporting by Wendell Roelf in Cape Town and Mfuneko Toyana in Johannesburg; Editing by James Macharia and Hugh Lawson)

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S&P holds South Africa’s credit rating; downgrades outlook to negative

5 December 2015 Comments (0) Africa, Business, Latest Updates from Reuters

JOHANNESBURG (Reuters) – Standard & Poor’s kept South Africa’s credit rating at BBB- on Friday but changed its outlook to negative from stable, saying this reflected the view that economic growth might be lower than expected.

In a statement, S&P said it expected GDP growth in 2016 to remain around 1.6 percent and only increase above 2 percent from 2017 as the capacity of electricity supply improved.

“The negative outlook reflects our view that GDP growth might be lower than we currently expect, or that fiscal flexibility might reduce owing to contingency risks from state-owned entities with weak balance sheets,” it said.

The Treasury did not immediately comment on the S&P move on Friday, with a spokeswoman saying it would issue a statement once the Fitch review was out.

The rand currency briefly turned weaker against the dollar after the statement, before recouping some of the losses.

“The decision to change the outlook … speaks volumes of the steady deterioration in credit metrics that has enveloped South Africa post-crisis,” Standard Chartered analyst Razia said, referring to the 2008/2009 crisis during which South Africa fell into recession.

“The potential loss of South Africa’s hard-won investment grade rating, should serve as a wake-up call to try even harder to arrest this deterioration.”

S&P had said in March Pretoria’s rating was unlikely to change in the next 24 months, but warned an electricity crunch would shave 0.3 percent off economic growth this year.

Africa’s most industrialised but struggling economy has seen its sovereign ratings by Moody’s and S&P gradually slip to just one notch above non-investment grade.

Fitch, which rates South Africa at BBB with a negative outlook, was also due to issue a review later on Friday.

The agency said in October that weakened economic growth compounded South Africa’s fiscal challenges.

The National Treasury cut its economic growth forecast for 2015 to 1.5 percent in October from the 2 percent predicted in February, citing domestic energy constraints and the impact of a global slowdown

 

(Reporting by Stella Mapenzauswa; Editing by James Macharia)

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South Africa’s Financial Minister says ratings downgrade would impact markets

2 December 2015 Comments (0) Africa, Business, Latest Updates from Reuters

PRETORIA (Reuters) – South Africa’s finance minister said on Wednesday that a potential credit ratings downgrade would impact markets in Africa’s most industrialised economy.

The rand remained on fragile ground against the dollar as investors fretted about a possible credit rating downgrade.

“We are always on the lookout for such. We are always on alert. If it does happen, it will have an impact on markets,” Finance Minister Nhlanhla Nene told Reuters before the South Africa-China bilateral talks in Pretoria.

By 1445 GMT the rand, which hit an all-time low of 14.4950 versus the greenback in the previous session, was trading 0.3 percent higher at 14.3925.

Traders said investors were focused on Friday’s reviews from Fitch, which rates South Africa at BBB with a negative outlook and warned of a possible downgrade in September, and from Standard & Poor’s, which has it at BBB- with a stable outlook.

“The currency situation is doing what it is supposed to do,” Nene said. “Our floating exchange rate serves as a shock absorber when it comes to external shocks and we have seen that happening. It supports our manufacturing and export industries.”

Nene backed a decision by the central bank, which raised interest rates to 6.25 percent last month, citing that the priority for monetary policy was to keep inflation within a 3-6 percent target range.

Headline consumer inflation ticked up to 4.7 percent year-on-year in October compared with 4.6 percent in September.

“It is meant to send a signal to try and deal with inflation expectations. I think it was timely,” Nene said.

 

(Reporting by Joe Brock; Editing by James Macharia)

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