South Africa moved closer to a junk credit rating after Fitch Ratings Ltd. changed the outlook on its assessment to negative from stable and warned that continued political instability could result in a downgrade.
The ratings for foreign currency and local currency were kept at BBB-, the lowest investment-grade level and on par with Hungary and Russia. S&P Global Ratings, which shares Fitch’s assessment, will publish its report on December 2.
Political risks to the standards of governance and policy making have increased and will remain high at least until the ruling African National Congress’ leadership election in December next year, Fitch said Friday in an e-mailed statement. Continued political instability that adversely affects standards of governance, the economy or public finances could lead to a downgrade, the company said.
“It does strengthen the narrative that things are pretty troubling right now and that the country really needs to turn things around,” said John Ashbourne, the Africa economist at Capital Economics Ltd. in London. “Moody’s is the most likely to change because it’s a bit of an outlier but I think these agencies all look at the same thing so they all probably look at things similarly.”
The rand weakened as much as 0.5 percent before reversing the decline to trade 0.3 percent stronger at 14.11 per dollar. A weakening currency and low economic growth are among the factors driving an increase in South Africa’s level of debt as a percentage of gross domestic product, Moody’s Investors Service said Friday, without making any announcement on the country’s rating or outlook. The nation’s debt to GDP ratio stands at 44 percent, data compiled by Bloomberg show.
Political turmoil in Africa’s most-industrialized economy, including now-dropped fraud charges against Finance Minister Pravin Gordhan, has overshadowed the state’s efforts to boost investor and business confidence, including 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.
Gordhan, 67, who has led efforts to stave off a downgrade while wrangling with President Jacob Zuma over the management of state-owned companies and the national tax agency, said Friday he was “optimistic” about Moody’s review after Fitch left its rating unchanged.
Gordhan was reappointed at the end of last year to the position he held from 2009 until 2014 after Zuma was forced to change his decision to replace former Finance Minister Nhlanhla Nene with a then little-known lawmaker, which sent the rand and bonds plunging.
“The in-fighting within the ANC and the government is likely to continue over the next year,” Fitch said. “This will distract policy makers and lead to mixed messages that will continue to undermine the investment climate, thereby constraining GDP growth.”
