Junk status warning for South Africa after latest downgrade

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Treasury has warned that South Africa needs to reinvigorate the economy urgently or face a downgrade to ‘junk’ status by ratings firms later in the year.

Treasury’s comment comes after ratings agency Fitch downgraded the country’s local currency debt rating by one level to one notch above subinvestment grade.

Fitch downgraded South Africa’s rand denominated debt to BBB- in a review published on Friday.

According to Reuters, South Africa was one of 23 countries to have their local currency rating cut. It said that approximately 90% of the country’s R2.2 trillion debt is in local currency.

Treasury said in a statement that the revised guidelines by Fitch reflects its assessment that the credit risk profile of sovereign local and foreign currency debt should be closely aligned.

“As a result of the above change in approach, the agency has aligned South Africa’s long-term local currency rating to the long-term foreign currency rating at ‘BBB-’ with a stable outlook.”

Treasury said that although the action represents an alignment, “it also serves as a timely reminder of the risks of a downgrade that lie ahead and the urgency of actions required to reinvigorate the economy”.

“We must persist with, and redouble our efforts to work together – government, business and labour – to improve our growth prospects and to create more business and work opportunities,” Treasury said.

It added that the National Development Plan and the 9-point plan already identified some of the reform measures that, “if we continue to implement diligently, will alter our fortunes in the period ahead”.

The SA Reserve Bank’s latest forecast is for 0% growth in 2016 compared with 0.6% previously,  governor Lesetja Kganyago said last week.

Growth rates of 1.1% and 1.5% are now forecast for the next two years, down from 1.3% and 1.7% previously. Sarb’s estimate of potential output has been revised down marginally to 1.4% in 2016, rising to 1.7% in 2018.

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