How the Recent Credit Rating Downgrade Affects South Africa

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Finance | Biggy

Amidst South Africa’s financial minister turmoil, the country’s credit rating was downgraded.  Late last year, shortly after David van Rooyen was hired to replace Nhlanhla Nene, credit ratings agencies downgraded South Africa’s credit rating to BBB-.

BBB-, the rating given our country’s credit by Fitch and Standard and Poor (S&P), represents the lowest investment grade, and it is only one notch above ‘junk’ status.  Fitch downgraded South Africa’s credit rating in November of last year, citing rising debt and a slowing economy as its motivation.

This essentially matches a warning issued by Standard and Poor last year that stated that deviation from South Africa’s fiscal policy could lead to a ratings downgrade.

Moody’s credit rating is Baa2, which is the equivalent of BBB.  This may be a notch higher on the scale, but that alone is not enough to inspire confidence in the fact that Fitch’s projected growth statistics for the country had dropped from 2.1 to 1.4 percent.  This year’s growth was projected to be 2.3 percent, but that has been dropped to 1.7 percent.

Again, this echoes S&P’s outlook for South Africa’s position, which the agency has described as ‘negative’.  Like Fitch, S&P predicts slower levels of growth in 2016.

What the Credit Rating Downgrade Means for South Africa

South Africa needs investors to help it emerge from this era of financial decline.  However, with the country risking being rated as junk country, this may prove impossible.  This is because there are policies limiting professional investors, like asset managers, pension funds, and hedge funds, from investing in junk countries.

This situation was described by the former governor of the Reserve Bank, Tito Mboweni, as being a ‘dark cloud, mist, or fog’ over our nation.  While dramatic, this certainly represents the direness of the situation.

With the country risking falling one more notch into junk status, immediate action needs to be taken.  Mboweni added that a defence mechanism should be formulated and implemented immediately if the nation hopes to claw its way out of its current financial tumult.

Mboweni declared that the defence mechanism should consist of three facets; these being a consistent fiscal stance – given that deviation from the current stance would result in further credit rating demotion – as well as the reinforcement of central bank independency and an increased respect for independent institutions.

What the Future Holds

Will South Africa’s credit rating be relegated to junk status in the next ratings round?  This can only be answered by the government, who holds the responsibility of improving the country’s standings.

While Zuma took control of the country during a global financial crisis, he has not been able to pull the country out of its economic turmoil which has been exacerbated by unemployment, labour unrest, and corruption.

If Zuma’s administration is to save the country from junk status, it needs to implement an effective plan immediately.

Image credit: http://www.moneyweb.co.za/news/economy/south-africas-debt-already-pricing-junk-rating/

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