South Africa is on an "almost inevitable" path to junk status without a large enough crisis to jolt it into gear and engender fundamental change in how things are done, Peter Attard Montalto, emerging markets economist at Nomura, said on Friday.
"It is a story of the grinding underperformance of an economy held back by uncertainty, lack of policy cohesion, lack of key reforms and frequent policy mistakes," he explained.
With S&P's rating update for South Africa due on June 3, Montalto said that ratings agencies "are not the fastest moving entities, and SA is not the most dramatic 'flash bang, fiscal cliff, sudden stop, recession' story".
Nomura expects no change, but Montalto said he cannot absolutely rule out a change.
"We still see December as more likely. We think Fitch will downgrade the outlook only," he added. Fitch's ratings announcement is also expected in June.
There are two key sets of ratings changes this year: Now - and a few weeks back for Moody's - and after the mini budget in November/December.
Montalto explained that the impact of South Africa’s rating moving to sub-investment grade would involve bank funding costs and higher sovereign debt service costs as the main impact over time.
"We think this move is almost inevitable - given the lack of policy cohesion and politics," he said.
"We need to remember the rating of South Africa is a marginal case where we think that short-term satisfaction about fiscal, debt and institutions will give way to long-run issues of unsustainability in a persistently low (growth) environment."
As such these risks are needed, over time, to be recognised with BB+ rather than BBB-, in his view.
Nomura expects the S&P rating to remain unchanged, but sees a relatively high 40% chance of parallel cuts in local and foreign ratings.
Montalto believes S&P already sees South Africa as junk in the back of its mind, contingent on low growth and a lack of reform, especially around expanding contingent liabilities.
"Despite our view of a hold, we expect a pretty bleak statement – unlike the rose-tinted glasses that Moody’s applied. We expect S&P to say that growth may well be higher next year, but it would still be inadequate then, and in the medium run, to improve the credit picture."
As for Fitch, Montalto predicts the rating being affirmed at BBB-, but a negative outlook applied.
"We see a 30% chance of a cut directly from stable given the political situation, but think that ultimately the agency will wait and see on growth, fiscal and reforms through the year," he said.
"An outright cut in the rating is possible, but we assign only a moderate probability to one. We can see such a move as possible given the political situation and Fitch taking a more sceptical view on medium-run reform potential."
As for growth in the gross domestic product, Nomura is revising down its 2016 growth forecast to 0.6% from 0.9% previously. It is keeping its 2017 forecast at 1.5% and 2018 at 1.9%.