Downgrade fears averted as Fitch holds SA's credit rating steady at BBB

07 June 2015 - 02:03 By MARIAM ISA

Finance Minister Nhlanhla Nene must have breathed a sigh of relief late on Friday, after ratings agency Fitch decided not to downgrade South Africa's sovereign credit rating, instead affirming it at BBB. This dispelled concerns over a possible downgrade that would have placed the country's foreign debt rating at the lowest investment grade level - a notch above the "junk" status, shunned by investors and in line with rival agency Standard & Poor's. Credit ratings are important as they determine a country's cost of borrowing and affect the appetite of global investors.But Fitch warned that the outlook on the rating remained "negative", which reflects the risks of a downgrade in the medium term if economic growth is weak and policy measures damage the investment climate - both of which business leaders believe is already happening.The ratings agency lowered its growth forecasts for the economy to 2.1% this year and 2.3% next year, blaming "inadequate and unstable" electricity supply. "However, we forecast growth to pick up to 3% in 2017 as energy constraints start to ease somewhat," it said.President Jacob Zuma has warned that scheduled power cuts are likely to continue for three years as Eskom battles to maintain ageing infrastructure.story_article_left1Nevertheless, Fitch's decision will provide a welcome respite for South Africa after a period of disturbing feedback.During the first quarter of this year unemployment surged to 26.4% - a 13-year peak - while growth slowed to 1.3% as power outages took a toll on manufacturing and drought hit the agricultural sector.The good news from Fitch comes in the same week that the SA Chamber of Commerce and Industry reported that its business confidence index for last month slipped to a 16-year low, while the HSBC purchasing managers' index dipped to a three-month low.Fitch cited a number of positive factors that supported the current rating and averted the possible downgrade.For one thing, it said South Africa's standards of governance and business climate were stronger than the average for other countries ranked in the BBB range.Another positive was the narrowing deficit on the country's current account, its broadest measure of trade in goods and services with other countries.This shortfall on the current account has always been seen as a key vulnerability, as it created reliance on money flowing in from foreign investors - which can fluctuate depending on global investor sentiment and the perception of risk.But Fitch said "the floating exchange rate, moderate foreign currency debts and overseas assets provide buffers against a 'sudden stop' of capital inflows or its effects".It said the deficit was likely to contract to 4.5% of GDP this year from 5.4% last year, and shrink further to 4.3% next year.Fitch was relatively upbeat about the trajectory of the budget deficit, which amounted to 3.5% of GDP in the year to end March, well below the Treasury's February forecast of 3.9%. Fitch predicts it will shrink to 2.9% next year and 2.5% in 2017.In part, Fitch also appears to have been reassured by the fact that a deal has been struck between government and trade unions over public sector wages - a sector of the economy that accounts for about 40% of non-interest spending.This appears to have averted another costly strike for now but cracks are showing in the agreement with the unions.story_article_right2Fitch said that although public debt was higher than SA's rating peers, it should stabilise if the government meets its fiscal targets, after peaking at 50% of GDP in fiscal 2017.The Fitch decision means that its rating remains one level above Standard & Poor's, and on a par with the rating from Moody's Investor Services.Moody's has a "stable" outlook on South Africa's rating, which suggests it is not likely to downgrade the country anytime soon. But Moody's has traditionally always been more upbeat about the country's finances.Many analysts appeared to have been expecting a downgrade, as the rand weakened to its lowest level in 13 years this week, before recovering to R12.58 against the US dollar.In addition, private investment has faltered in recent months as business becomes increasingly disillusioned by the lack of clarity around legislation, and private sector property rights are threatened.Inflation is rising rapidly in response to a recovery in oil prices as well as higher electricity tariffs, and the Reserve Bank has repeatedly warned that interest rates will have to rise soon. This first hike could materialise at the Bank's next policy meeting in July.Meanwhile, also late on Friday, officials from the US and South Africa said they had reached a deal to renew exports of US chicken to South Africa.The local industry has been protected by anti-dumping tariffs since 2000.US and South African officials met in Paris this week to discuss trade issues, including the standoff on poultry. They said a deal was struck that allows for the "return of exports to South Africa of US bone-in chicken".Trade and Industry Minister Rob Davies said the deal "facilitates South Africa's continued participation in Agoa [the US African Growth and Opportunity Act] and is a commendable effort by the poultry industry in the interest of the South African economy".US and South African officials said in a joint statement: "While both sides recognise it may take some time for the South African government to complete its regulatory process, both sides are committed to expedite processes and resume shipments of US chicken as quickly as possible."

This article is reserved for Sunday Times subscribers.

A subscription gives you full digital access to all Sunday Times content.

Already subscribed? Simply sign in below.

Registered on the BusinessLIVE, Business Day or Financial Mail websites? Sign in with the same details.

Questions or problems? Email or call 0860 52 52 00.