South Africa has avoided a downgrade to junk status, but global ratings agency Standard & Poor (S&P) has maintained that outlook remains negative on weak growth.

“The outlook remains negative, reflecting the potential adverse consequences of low GDP growth and signaling that we could lower our ratings on South Africa this year or next if policy measures do not turn the economy around,” S&P said in a statement.

This is in line with economists predicting that a downgrade is a certainty for South Africa, even if it doesn’t happen right now. Some economists have predicted that the country’s debt ratings could be downgraded at the end of the year.

On 3 June S&P affirming its ‘BBB-/A-3’ foreign currency and ‘BBB+/A-2’ local currency ratings on South Africa.

A motivating factor was the energy sector where improvements will likely reduce some of the economic bottlenecks and pending finalisation of labour and mining reforms could engender a positive confidence shock.

In addition to this, the government is showing greater resolve to reduce fiscal deficits at a faster pace than expected.

However, the ratings agency warned that rising political tensions are accentuating vulnerabilities in the country’s sovereign credit profile.

 

Downgrade a strong possibility

Despite affirming South Africa’s debt ratings, S&P warned: “The negative outlook reflects the potential adverse consequences of low growth and signals that we could lower our ratings on South Africa this year or next if policy measures do not turn the economy around.”

Ratings could be lowered if GDP growth does not improve in line with S&P’s current expectations, or wealth levels continue to decline in U.S. dollar terms.

The agency added that ratings could also be lowered if it believes that institutions have become weaker due to political interference affecting the government’s policy framework.

 

Government welcomes decision

Government has welcomed S&P’s decision to affirm South Africa’s credit ratings.

“The benefit of this decision is that South Africa is given more time to demonstrate further concrete implementation of reforms that are underway aimed at achieving higher levels of inclusive growth and place public finances on a sustainable path,” it said in a statement.

“I congratulate Team South Africa constituted by government, business and labour for the sterling work that has been done over the last few months to turn our economy around,” said President Jacob Zuma.

“Let us use these positive developments to work even harder together to move South Africa forward.”

Government is aware that the next six months are critical and there is a need to step up the implementation of the 9-point plan and other measures to boost the economy.

Government, business and labour will collectively intensify efforts aimed at:

1. Restoring confidence and boosting investment amongst local and international investors
2. Unblocking obstacles to faster employment growth in key sectors
3. Undertaking fiscal, State-Owned Companies (SOCs) and regulatory reforms