Economic recovery key to warding off junk

Johannesburg - South

Africa’s chances of repeating its escape from a junk credit rating in 2017 are

in the balance as focus intensifies on tepid economic growth and simmering

political tensions.

S&P Global Ratings

kept its assessment of the nation’s foreign-currency debt at BBB-, one level

above non-investment grade, with a negative outlook on December 2, while

cutting the local-currency rating by a step to BBB. S&P’s affirmation

follows that of Fitch Ratings Ltd. a week earlier, which also left South

Africa’s foreign-currency assessment at one level above junk, while Moody’s

Investors Service’s rating is one step higher. The reprieve may be short-lived

if the government doesn’t take steps to accelerate economic growth, according

to Piotr Matys, an emerging-market currency strategist at Rabobank in London.

“Comments from S&P

imply that it is absolutely crucial for South Africa to accelerate the pace of

implementing structural reforms to avoid a downgrade in the coming months,”

Matys said in an e-mailed response to questions. Prolonged political

“infighting may delay an implementation of reforms, which would increase the

odds that S&P may downgrade South Africa to junk,” he said.

Political turmoil in

Africa’s most-industrialized economy, including an investigation into Finance

Minister Pravin Gordhan, has overshadowed the state’s efforts to boost investor

and business confidence, such as recent proposals to stabilize the labor

market. The slowest output growth this year since a 2009 recession will

complicate Gordhan’s pledge to narrow the budget deficit to 2.5 percent of

gross domestic product by 2020, from a projected 3.4 percent this year, and to

limit government debt.

‘Piecemeal delivery’

S&P said political

events have distracted from growth-enhancing reforms and slow output growth

continues to affect the nation’s fiscal performance and overall debt levels,

and is a ratings weakness. While the government has identified important

reforms and supply bottlenecks in the economy, “delivery has been piecemeal,”

the company said.

S&P gave South Africa

the benefit of the doubt, Peter Attard Montalto, a London-based economist at

Nomura International, in an e-mailed note.

Read also:  S&P holds South Africa's rating, downgrades debt

“This can’t continue

forever and the downgrade of the local-currency rating is a crystallised view

of increasing risk in the eyes of S&P” from politics, the poor growth

outlook and the slow implementation of reforms, he said.

Gordhan, 67, has been

leading efforts to avoid a downgrade to junk with meetings between the

government, business and labour and by talking to foreign investors. However, a

standoff between him and President Jacob Zuma over control of the Treasury and

state-owned companies, delays in passing new mining and anti-money laundering

laws and a failed attempt by senior African National Congress officials last

week to oust Zuma have fuelled perceptions of political turmoil and policy

uncertainty.

Short celebration

The National Treasury

recognizes what needs to be done and is committed to implement the reforms

needed, it said in a statement after S&P’s announcement.

“We can celebrate for a

few hours, come Monday we must roll up our sleeves and get down to work and do

what is necessary to make sure that come six months’ time we will not be

panicking,” Lungisa Fuzile, the head of the Treasury, said by phone on December

2.

The economy will probably

expand 0.4 percent this year and 1.2 percent in 2017, according to the central

bank. That’s not enough to reduce the nation’s 27 percent unemployment rate,

Governor Lesetja Kganyago said on Nov. 30.

“The risk is still

significant that we may see sub-investment grade on the foreign currency

sometime during next year,” Ettienne le Roux, chief economist at FirstRand’s

Rand Merchant Bank in Johannesburg, said by phone. “The key issue is the lack

of GDP growth.”

BLOOMBERG