SA braces for midnight verdict from S&P

S&P Global Ratings is scheduled to deliver its latest verdict on SA’s credit worthiness on Friday, which it usually does around midnight.

At its last South African sovereign credit rating decision, on November 24, S&P cut rand-denominated government bonds to its first tier of junk, BB+.

When making the downgrade, it changed its outlook from negative to stable.

The big three credit rating agencies tend to use their outlooks to give at least three months’ advance warning if they intend to change the sovereign credit rating of a given country.

This means the stable outlook that S&P gave SA in November makes a further downgrade unlikely in Friday’s review.

But there is the fear that S&P will change its outlook to negative, given the parlous states of Eskom, South African Airways and other state-owned enterprises.

In February, S&P cut Eskom’s credit rating to its seventh tier of junk, CCC+.

“Downside pressure on the ratings could develop if economic performance and fiscal outcomes deteriorate further from our forecasts. Further pressure on SA’s standards of public governance, for example in our perception of a threat to the independence of the central bank, could also cause renewed downward pressure,” S&P said in November.

This was before Cyril Ramaphosa replaced Jacob Zuma as SA’s president.

Ramaphosa’s appointment of Pravin Gordhan as public enterprises minister and reappointment of Nhlanhla Nene as finance minister address some of the concerns S&P raised in past reports.

Given the new president’s efforts to fix the problems his predecessor created, S&P is most likely to simply re-affirm SA’s BB+ rating with stable outlook at midnight.

The credit rating agency’s concerns about SA’s high unemployment and sluggish economic growth make it unlikely it will raise its outlook from stable to positive.

It said in its last report: “Excluding agriculture and mining, SA’s services-dominated economy is barely growing. The private sector is investing less than the depreciation of the capital stock.

“On a per capita basis, consumption is declining. Despite close to 40% depreciation in the nominal effective exchange rate since September 2007, exports of manufacturing and other noncommodity sectors have been sluggish. This is the case even though the global economy is improving.

“Other than an absence of investment, SA’s high level of unemployment is a function of an inflexible labour market with rigid wage-setting mechanisms and high barriers to entry and exit.

“This mix, alongside an inadequate educational system, has contributed to the economy’s stark inequalities and has dragged further on SA’s external competitiveness and average incomes.”