SA ratings downgrade ‘imminent’ – Standard Bank
A downgrade of South Africa’s rating by agencies such as Moody’s, Standard & Poors (S&P) and Fitch was “imminent”, as the country continues to battle growth headwinds while shouldering a hefty debt burden, Standard Bank currency strategist Yvette Babb told a media briefing on Thursday.
“This prediction is centered around the country’s poor growth forecast – which we put at 2.2% year-on-year – and, from a policy perspective, it is unlikely that we’ll see a change in the twin deficits,” she said, in reference to South Africa’s current account and budget account deficits.
“[Of all African States], South Africa is probably at the greatest risk of a downgrade next week, as its fiscal deficit has remained elevated since 2009.”
Ratings agency Moody's currently had a Baa1 rating for South Africa, coupled with a “negative” outlook, while S&P had issued a BBB rating, also predicting a “negative” future ratings movement.
Fitch had rated the country BB-, with a “negative” outlook. The agencies were expected to announce their reviewed ratings on June 13.
Babb's bearish comments came despite the country’s current account deficit narrowing to a surprising 5.1% of gross domestic product (GDP) in the fourth quarter of 2013.
However, rising fiscal deficits on the continent were driving debt levels higher, Babbs added, noting that a strengthening trend in Africa – to which South Africa was not immune – was the use of external or foreign finances to “front” infrastructure development.
She added that a decline in support from development partners, or even the threat thereof, coupled with waning investor confidence, posed a further challenge for fiscal and external balances.
Moreover, the International Monetary Fund had recently warned African countries to be cautious of not allowing the pace of infrastructure development to exceed that of available domestic investment.
“We can’t simply expect external finances to front local development; the accumulation of debt must be done in a sustainable way,” Babb cautioned.
HEAVY LIFTING
Further elaborating on South Africa’s prospects for the year ahead, Standard Bank noted in a recent African markets report that it expected investment to continue to make a positive contribution to GDP growth this year, adding that the country needed to move “well above” the “lackluster” 4.8% year-on-year investment growth of the fourth quarter of last year.
“In particular, we need to see private sector investment doing more of the heavy lifting,” the bank stated.
The fiscal deficit was expected to improve to R153.1-billion, or 4% of GDP, in 2014/15, R150.3-billion, or 3.6% of GDP, in 2015/16 and R126.9-billion, or 2.8% of GDP, in 2016/17.
“We remain reasonably confident that the government will be able to deliver the gradual consolidation outlined in the Medium-Term Expenditure Framework. While recognising that downside risks to growth pose some cyclical risks to revenues, official estimates tend to have a conservative bias, and there might be some room for discretionary tightening,” read the report.
Looking to monetary policy, as expected by Standard Bank, the South African Reserve Bank again left interest rates on hold at its May Monetary Policy Committee meeting.
The bank said the forward-rate agreements had now priced out a significant portion of any monetary tightening that had been discounted at the height of the rand sell-off at the end of January.
“However, if the rand continues its rebound, we suspect that policy will be on hold for the rest of the year and tightening will only continue once there are signs of more robust domestic demand,” it held.
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