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National Treasury has reason to fear Friday 13 June

11 June 2014 Jean-Pierre du Plessis, Prescient
Jean-Pierre du Plessis, Fixed Interest Strategist at Prescient Investment Management.

Jean-Pierre du Plessis, Fixed Interest Strategist at Prescient Investment Management.

With two ratings agencies due to announce their reviews of the country’s ratings on Friday, it’s not superstition that will be making those working in the National Treasury nervous.

Jean-Pierre du Plessis, Fixed Interest Strategist at Prescient Investment Management commented today that it is widely expected that Standard & Poor’s (S&P) will downgrade the local currency rating to bring it in line with the other agencies.

In addition, S&P and Fitch have both announced that they will be publicising the result of their review of South Africa’s sovereign rating.

“Given the economic, industrial action and political backdrop it is possible that the agencies may take action. The potential impact of a ratings downgrade would include weakness in our currency and bond markets as foreign investors question the risk attached to owning South African debt.

“This will likely result in a steeper yield curve, and domestic banks could also see their funding costs raised if their ratings are downgraded in unison with the state,” said du Plessis.

S&P rates South Africa’s long-term foreign currency at BBB/A- (long-term foreign currency/local currency), while Fitch rates the sovereign at BBB/BBB+ (LT FC/LC).

Du Plessis said there are many aspects of the domestic economy that could result in a rating agency downgrade.

“The national debt continues to climb as government spending is predicated on optimistic growth numbers. Also worrying is that the economy has failed to improve despite global growth improving and weakness in the rand over the last two years.

“In addition, we had negative first quarter GDP growth (-0.6%) and it looks likely that there may also be contraction in the second quarter, given the backdrop of industrial action. The lack of an effective labour dispute resolution process means that we could face ongoing industrial action which would impact long-term foreign investment and growth prospects.”

Du Plessis added that South Africa’s current account deficit remains high while the country’s reliance on foreign investment flows makes it vulnerable to shocks.

The new steward of fiscal policy, Finance Minister Nhlanhla Nene is untested and appears not to have the political weight of his predecessor. Also, the reliance of State-owned corporations on guarantees both explicit and implicit is adding to the state’s contingent liabilities.

Rating agencies want to see more fiscal discipline which will entail limiting further growth in South Africa’s debt to GDP, the implementation of the National Development Plan and less volatile industrial relations.

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