A downgrade of South Africa’s credit rating to junk was currently only partially priced in, a leading bank economist warned on Monday, arguing that a negative assessment by Standard & Poor’s (S&P’s) on June 3 would most probably trigger a recession and precipitate the shedding of around 200 000 more jobs.

In fact, Standard Bank chief economist Goolam Ballim described as “inaccurate” arguments that the downgrade was already fully reflected in the weaker rand, wider credit default swaps and lower equities. The prospect of being junked, he countered, was still mostly confined to financial markets with the real economy likely to feel the effects only after the downgrade.

S&P’s had assigned South Africa a BBB- foreign currency sovereign rating, with a negative outlook and would publish a ratings review in the coming weeks.

Modelling the impact of downgrades to noninvestment status in six peer countries – Brazil, Bulgaria, Croatia, Hungary, Romania and Russia – the bank found that, without exception, the countries had descended into recessions lasting more than a year.

In the case of South Africa, the bank expected the country to grow by only 0.6% in the absence of a downgrade. However, should it be downgraded, the economy was likely to shrink by 0.3% in 2016, thereby entering its first recession since the global financial crisis-induced 2009 contraction.

As a consequence, wealthier South Africans would see their wealth eroded, middle-class South Africa’s would face a slippage in their incomes, while poor South Africans could be “structurally locked out” of the economy and become even more dependent on State support.

The initial reaction would be felt on the financial markets, with Ballim cautioning that the rand could pierce R17 to the dollar soon after the announcement was made.

REAL ECONOMY SMASH

However, the real economy would bear the brunt of the change in status, with the mining, manufacturing, agriculture and utilities sectors already in negative territory and likely to weaken further post any downgrade. These sectors comprised 24% of gross domestic product (GDP) and housed 20% of formal jobs. The construction, transport and wholesale and retail trade sectors, representing 45% of GDP and 66% of employment, would also experience negative spillovers.

“Financial markets tend to convulse prior to the downgrade, [while] the real economy smashes afterwards.”

By contrast, a reprieve in early June would serve as a “relief to” the financial markets in the form of a stronger currency, falling yields and rising equity markets. “That relief in financial markets is its own stimulus to the real economy.”

Ballim acknowledged that most commentators were convinced that there would be a downgrade. However, he was hopeful that S&P’s would balance its analysis of South Africa’s weak growth and revenue performance with “qualitative” factors, most notably the recent coming together, under the leadership of Finance Minister Pravin Gordhan, of government, business and labour in an effort to reignite growth.

“I have the hope that S&P’s leans heavily towards the qualitative elements within its assessment and provides South Africa with a reprieve. And I do think it is both probable and plausible,” Ballim said, while noting that it would be sensible for companies and households to prepare for a downgrade.

S&P’s had already indicated that it would take account of factors outside of the growth and fiscal “pressure points” when conducting its review, including assessments of the country political and institutional performance.

Recent reports on the possible arrest of Gordhan would have weighed on its assessment, with the Finance Minister’s position and the credibility of the National Treasury likely to be key to the outcome of the review.

“For the first time, we have a semblance of social compact emerging with government and business, with National Treasury at the helm, and certain labour segments also subscribing to this dialogue. And we should not underestimate the meaning of what has been born out of what was initially President [Jacob Zuma’s] overreach in December,” Ballim said, referring to Zuma’s decision to replace Nlhanhla Nene with the unknown David van Rooyen.

He said he had impressed on S&P’s his belief that a downgrade would be counter-productive to that “political reformation and recalibration”.

“S&P’s said to me quite simply that they, of course, would not take the decision lightly.”