IMF downgrade could signal further rating downgrade for SA

The recent downgrade by the International Monetary Fund (IMF) to South Africa’s economic growth for 2014 to 1.4% from 1.7%, highlights the fragility of the local economy and could signal a further sovereign credit rating downgrade or negative amendment to the outlook. The downward revision by the IMF is aligned to the South African Reserve Bank’s recent downward guidance of around 1.5% GDP growth for 2014.

This is according to Marc Joffe, CEO at Global Credit Ratings (GCR), who says it is the third time the IMF has cut the economic growth outlook for South Africa this year. “We are not surprised that the IMF has cut its forecast for South Africa’s economic growth once again. The economy is facing a number of constraints to growth, which in the absence of any meaningful solution by government to address this issue could lead to a negative outlook or further downgrade to South Africa’s credit rating.” 

The SA Revenue Service recently announced that South Africa’s trade account recorded a R16 billion shortfall in August, the biggest gap in seven months, while figures from the National Treasury revealed that the budget deficit grew sharply in the first five months of the year to R111.8 billion, from R92.3 billion a year ago. 

Joffe notes that the combination of negative economic data with the prospect of a further widening of the deficit, underlines the very real structural problems facing the local economy. “This negative news has had a huge impact on the Rand, which has experienced significant weakness throughout the year, pushing up a myriad of costs for local companies.” 

“When we combine this with the current weakness in the labour market and general lack of job creation, we are facing some intense pressures, with little prospect of any positive news. All of this suggests there is little good news for credit ratings agencies to consider when reviewing South Africa’s sovereign credit rating.” 

“As a result, on the basis of sustained negative economic data and tax collection constraints, we believe that it could be a case of when, not if, we will see a further downgrade to the country’s credit rating. Should this happen, it would raise the cost of borrowing for both South Africa and state-owned entities. As a country we already spend about 3% of GDP on interest payments, so we simply cannot afford to spend more if we want to maintain current levels of social spending and fund the Government’s proposed R1 trillion infrastructure programme.” 

He adds that faster levels of economic growth are being recorded in the rest of Africa, which could see some realignment of investor funds towards these markets at South Africa’s expense. 

“With new Finance Minister Nhlanhla Nene’s first medium-term budget policy statement due at the end of October 2014, we hope that this will provide some clarity on how the country plans to address the many problems we are currently facing in order to mitigate the risk of a further deterioration in economic growth and possible further downgrade to South Africa’s credit rating,” concludes Joffe.