The South African economy is under severe pressure after its long-term sovereign debt rating was cut to ‘junk’ by Standard & Poor’s, the second international ratings agency to do so. Pressure has been further increased on news about the third ratings agency- Moody’s, was also conducting a close scrutiny and review of its own ratings about the economy and is considering a possible downgrading.
Based on the assumption that the weaker-than-expected economic growth of the South African economy was negatively impacting the pubic accounts of the country, the debt of the country – which is dominated by foreign currency was brought one notch lower to BB while the economy’s long-term local currency debt rating was also downgraded by one notch to BB+ by the ratings agency S&P following the close of the London market on 24 November.
Earlier in the year in April, Fitch ratings had lowered the local and foreign currency ratings to junk and a day before the S&P announcement, it also kept its ratings unchanged.
Fitch issued a stark warning on Thursday, saying: “Government and the country collectively cannot afford to become complacent about these rising risk exposures.”
A ‘stable’ outlook was meanwhile carried on both rating by the S&P which means that a further downgrading of the ratings was most unlikely at least in the short-term period.
The two ratings agencies marking the economy as junk means that many of the investment funds would automatically be prevented from investing anything in the economy when two of the three rating agencies issues such ratings for an economy because it is believed that such investments would be just too risky to make. This has increased pressure of putting the financial books of the government in order – especially for those government officials who are placed in Pretoria.
“The downgrade reflects our opinion of further deterioration of South Africa’s economic outlook and its public finances. In our view, economic decisions in recent years have largely focused on the distribution–rather than the growth of–national income. As a consequence, South Africa’s economy has stagnated and external competitiveness has eroded,” S&P said.
Even though the government at Pretoria has been striving to take some measure for stabilizing the public finances, according to the S&P’s judgement, those “off-setting” measures would not suffice to meet the immediate demands of the economy.
The possibility that the central bank of the country would run threat of losing its independence because of the risks that are looming over the economy, was highlighted by the analysts at S&P.
However, a positive note was also added by the ratings agency. The policy makers in the country could be allowed to focus on “designing and implementing measures to improve economic growth and stabilize public finances” after the political instability in the country is reduced following the forthcoming party congress of the African National Congress, to be held in December of 2017, which would be in power at that time, believe the S&P analysts.
This is the reason or the stable outlook expressed by S&P.
The already bad rating of Baa3 was placed under review for another round of downgrading by Moody’s even as the ratings agency maintained its long-term ratings of the investment grade level for the economy.
The economy would be put under further strain and there could be some very potent finance outflows from the economy is the Moody’s also downgrades the economy, analysts said.
(Adapted from Digitallook.com)