Home News S.Africa braces for possible S&P junk credit rating

S.Africa braces for possible S&P junk credit rating

Published on 02/12/2016

South Africa's economy could be dealt a damaging blow later Friday when the Standard & Poor's rating agency is due to release an assessment that may downgrade its foreign currency debt to junk status.

S&P currently has South Africa — the continent’s most developed economy — rated at the lowest investment grade, one notch above junk.

The Fitch ratings firm last week kept South Africa one notch above junk, but dropped its outlook from stable to negative, citing the country’s recent political turmoil under President Jacob Zuma.

Also last week, Moody’s kept South Africa unchanged two notches above junk status.

“The South African economy is showing resilience, supported by strong and independent institutions,” the treasury said, welcoming the assessments.

But this week has seen further political drama when Zuma’s loyalists beat back an attempt by at least four ministers to oust him from power.

The rebellion was the most serious threat to the president since he took office in 2009.

Zuma has been engulfed by graft scandals, while South Africa’s economic growth has fallen to 0.5 percent and unemployment hit a 13-year high.

Efforts to avoid junk status have been at the centre of political wrangling for months, with Zuma at loggerheads with Finance Minister Pravin Gordhan, a reformist widely respected among international investors.

Gordhan had been due to appear in court last month on graft charges that many experts saw as an attempt by Zuma associates to oust him.

The charges were dropped at the last minute, exposing deep tensions in the ANC as several ministers came out in his support.

Analysts say a foreign currency downgrade to junk by S&P on Friday would be cushioned by the Moody’s and Fitch assessments.

“If it materialises, it would not impact South Africa’s inclusion in the major global bond indices. This would require two agencies cutting local currency ratings to junk status,” Dave Mohr, investment strategist at Old Mutual, said in a note.

S&P’s local currency rating for South Africa is three notches above junk.