In a highly anticipated decision, S&P has elected to affirm South Africa’s credit rating on foreign currency denominated government debt at its current investment grade, just one notch above “junk”. This was considered the less likely option by economists that were surveyed by Bloomberg in November. The ratings agency did, however, cut the rating on South African local currency denominated government debt to two notches above junk.
The reasons cited include:
- Political events transpiring which have been distracting the government from implementing reforms to enhance growth.
- Low growth potentially having adverse consequences on the “public balance sheet”.
The immediate reaction of the currency is shown in the chart below, which displays intraday exchange rates. As at the time of writing, the Rand had gained 1.57% against the Dollar for the day.
This decision comes after last week’s ratings action by Fitch, who also affirmed our foreign currency denominated government debt at investment grade, however they lowered their outlook to “Negative”. S&P’s affirmation today leaves the two agencies with the same rating and outlook. Moody’s did not issue a credit rating action last week, however they did publish a note on South African credit, citing political infighting, lack of structural reforms and protracted low business confidence as threats to the rating.
With S&P affirming the rating on foreign currency debt, South Africa has avoided what looked like the biggest threat to its investment-grade status. However, it has simply bought time until the next round of assessments halfway through next year. If growth, reform and politics do not improve in the next half-year or so, then South Africa will be back where it started - waiting anxiously on the word of international ratings agencies.