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South Africa still faces threat of downgrade to junk status, Cabinet reshuffle – economist

28th November 2016

By: Megan van Wyngaardt

Creamer Media Contributing Editor Online

  

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Financial services provider BNP Paribas Securities on Monday cautioned that South Africa was not out of the woods yet, with the risk of a ratings downgrade to ‘junk’ status by mid-2017 still high.

This comes after ratings agencies Moody’s and Fitch on Friday maintained South Africa’s current ratings.

“Inflation, especially core, is still undershooting estimates, as inflation break evens continue to soften,” economist Jeffrey Schultz said in a note on Monday.

He further noted that, as blows to President Jacob Zuma’s credibility have led markets to believe that his days are numbered, “incorrectly, so far”, politics continue to prevail in the country.

“While the rand initially benefited from this view, the US election has set the currency back again. The growth outlook remains poor, with quarterly gross domestic product likely to have slowed again significantly in the third quarter on softer industrial production and exports,” Schultz noted.

He also pointed out that there was a greater than 50% chance that Zuma would reshuffle the Cabinet again.

Schultz warned that food prices should also slide sharply from mid-2017 as global and local grain prices plunge, giving the South African Reserve Bank (SARB) room to ease interest rates.

“Our 5.4% estimate for 2017 consumer price index inflation remains 0.4 percentage points below consensus and the SARB,” Schultz added.

Further, he said that BNP Paribas was expecting 25 basis point rate cuts in both the third and fourth quarters of next year. Alongside political and rate hike risks from the US, sharply lower food prices in 2017 depend on better weather and only a modestly weaker rand into year-end.

The SARB will have less scope to ease rates if inflation expectations fail to fall further, he stated.

BNP Paribas revised its outlook for advanced economies upwards and the outlook for emerging markets downwards for 2017.

A consequence of more expansive fiscal policy, it would mostly be felt in the US, though faster import growth and a stronger dollar should boost other countries’ exports.

“However, we see less US monetary accommodation and more of it being used in the US, leaving less to flow abroad. Capital flows to emerging markets will reduce and those that have borrowed in dollars will face a stronger dollar and a higher set of dollar interest rates.”

He added that a US tightening is, broadly speaking, a tightening of monetary conditions in emerging markets too, but with different effects depending on different factors, including leverage and current account positions.

“Generally, our view is that the impact on emerging markets could be much differentiated between countries and, potentially, through time. This will largely depend on how US growth, inflation and the [US Federal Reserve] respond to the shift that is coming.

“Emerging markets likely to feel the most pain would be those with high current account deficits, including Turkey and South Africa,” he warned.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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