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'Fantastic Achievement': South Africa Averts 'Junk' Credit Rating Yet Again

© Sputnik / Vladimir PesnyaFitch rating agency
Fitch rating agency - Sputnik International
South Africa has retained its investment grade from major international agencies despite economic and fiscal struggles, resulting in higher expectations of an inclusive economic reform and return to quicker growth.

Kristian Rouz – International credit rating agencies reaffirmed South Africa’s investment rating yet again this year, which has proven to be rather tumultuous one for the nation’s economy.

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Balancing on the verge of ‘junk’ status due to low commodity prices and economic policy mismanagement, South Africa might capitalise on the newly-emerged hope for better economic prospects as metals gained in value in the international markets after Donald Trump’s election as US president, and commodities recieved a boost due to the anticipated OPEC oil production cap.

South African authorities cheered after the credit ratings were reaffirmed, with Finance Minister Pravin Gordhan having referred to the recent decisions from rating agencies as ‘fantastic achievement’ of his nation.

Fitch Ratings Ltd., having reaffirmed South Africa’s investment rating, moved the outlook to negative from stable in their allegedly last warning to the nation. Ongoing political instability and incoherent economic policy measures might result in an eventual downgrade to ‘junk’, Fitch said, having kept the ratings for foreign currency and local currency at BBB-, their lowest investment grade.

“The in-fighting within the ANC [African National Congress, South Africa’s ruling party] and the government is likely to continue over the next year,” Fitch said in a statement. “This will distract policy makers and lead to mixed messages that will continue to undermine the investment climate, thereby constraining GDP growth.”

Gordhan, for his part, welcomed the decision, having said that only a coordinated effort from the cabinet, private sector, unions and the public would allow for a return to sustainable economic growth. Fitch’s final warning, therefore, is seen as a call to action by South Africa’s Finance Ministry, yet, it remains unclear whether the nation will be able to consolidate its effort boosting the economy almost one year after the last major political scandal, resulting in chaos in the Finance Ministry and a plunge in the rand’s FX rate last December.

“This is a very good moment in South Africa, one that we should celebrate. We have retained our investment rating. That is key,” Gordhan said.

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The rand had dropped 0.5pc before ending the trading day on Friday 0.3pc stronger to 14.11 per dollar on the positive news. Persistently low economic growth, high unemployment, coupled with relatively a high debt-to-GDP level have all reflected negatively on the outlook for South Africa.

Debt-to-GDP currently stands at 44pc, fairly high compared to high-growth emerging markets, and the nation’s economy is not diversified enough to support greater borrowing, rendering fiscal stimulus hardly possible. On the other hand, the high inflation rate, standing at 6.4pc in October, rules out a central bank stimulus, meaning the South African authorities have limited options for boosting the economy, and an eventual ‘junk’ downgrade is deemed almost imminent, unless commodity exports keep gaining in value, driven by the industrial renaissance in the advanced economies.

The nation’s economy, according to Fitch estimates, will expand by 0.5pc this year, 1.3pc in 2017, and 2.1pc in 2018.

Moody’s Investor Service, another international credit rating agency, on Friday did not take action in regard to South Africa’s investment grade, keeping it at Baa2 without reaffirmation. The agency expressed concern over the nation’s debt-to-GDP accruing “steadily.” Moody’s rating for South Africa is currently two steps above ‘junk’, and the outlook is negative as the projected GDP pace would likely lag behind the expected increase in public debt.

“I think this is basically a way of negatively doing nothing. i.e. they did NOT want to affirm. This, I think, was an active decision to send a signal,” London-based economist Peter Attard Montalto of Nomura International Plc said.

South Africa is currently eyeing a fast-paced economic reform prospect, aimed at fostering business start-ups in the coloured communities. However, the main hope is an extended rebound in commodity prices.

“This buys us more time. I really believe we are on the brink of turning things around,” South African Treasury Director-General Lungisa Fuzile said.

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However, an inclusive reform would require decisive action in the higher echelons of South Africa’s political governance. With the ANC gradually losing their grip on the reins of power, and the opposition party Democratic Alliance (DA) gaining wider support, achieving greater coherency on the political side of things might be challenging. Whilst the DA-controlled province of Western Cape, which is poor in natural resources, has developed into a more decentralised, private sector-reliant high-growth economy, the rest of the country is still battling the consequences of a slump in coal and metals prices. Meanwhile, agriculture is another concern, mired by racial tensions.

“We need an effort right from the top of government to get this economy going,” economist Christie Viljoen of KPMG LLP in Cape Town said.

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