Bumpy ride ahead for economy, ratings downgrades loom

A woman waves the South African flag during a demonstration in Pretoria calling for president Jacob Zuma to resign in April 2017

A woman waves the South African flag during a demonstration in Pretoria calling for president Jacob Zuma to resign in April 2017

The country has also experienced numerous credit ratings downgrades from major agencies - Fitch, S&P, and Moody's - under Zuma's leadership.

But it is not completely not out of the woods yet, with Fitch's peers S&P Global and Moody's due to give their own reviews later on Friday.

S&P said its outlook on South Africa is "stable", meaning credit metrics are not expected to change significantly over the next year.

S&P Global Ratings downgraded South African local currency debt to "junk" territory on Friday, citing a further deterioration in the country's economic outlook and public finances, sending the rand tumbling.

Combined with multi-year highs for various indicators of output, demand, employment and inflation in November, the market outlook for the single currency remains strong.

This news is hardly encouraging, as South Africa's largest businesses have been in negotiations with the government of President Jacob Zuma since March, when the President replaced Finance Minister Pravin Gordhan with Gigaba.

"Political developments may provide insights into the direction, content and credibility of the future policy framework", she said.

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"The slip in the credit ratings increases the calls for reforms even louder and falling deeper into the red (In the instance that Moody's follows suite after the 2018 February budget)‚ may lead to more aggressive falls in the rand‚ government bonds and business and consumer confidence- which is needed to attract investment‚ create jobs and grow the economy‚" says Grater.

This outcome is more positive than if both S&P and Moody's had downgraded the local currency rating according to Ian Matthew head of business development at investment bank Bravura.

However‚ Matthews warns that S&P's decision will see South Africa excluded from the Barclays Global Aggregate index‚ whose inclusion criteria requires investment grade rating on its local currency debt from any two ratings agencies.

A selloff of rand bonds - which comprise about 90 per cent of South Africa's outstanding liabilities - would raise borrowing costs for the nation as it sells more debt to plug a widening budget gap.

South African debt has already been dropped from one of the widely used global bond indexes, the JPMorgan Emerging Market Bond Index Global according to Matthews. Importantly: "it reduces the money available for housing, education, healthcare and social grants".

"In our view, economic decisions in recent years have largely focused on the distribution - rather than the growth of - national income".

Little of the work done by the initiative developing a plan to avoid these downgrades had been implemented he said, adding that, instead political and policy uncertainty increased.

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