S&P Global Ratings decided on Friday to revise South Africa’s outlook from stable to negative, but refrained from downgrading the country further into junk.
The agency affirmed South Africa’s long term foreign currency debt rating at “BB” and local currency debt rating at “BB+”.
S&P said the rating was constrained by South Africa’s low GDP per capita growth, weak economic expansion, a large and rising government debt burden, and sizable contingent liabilities primarily tied to debt-laden power utility Eskom.
“The ratings are supported by the country’s monetary flexibility, well-capitalized and regulated financial sector, and deep capital markets. South Africa also has moderate external debt, in particular low levels of external debt denominated in foreign currency,” the agency said.
The outlook revision indicates that South Africa’s debt metrics are rapidly worsening as a result of the country’s very low GDP growth and high fiscal deficits, S&P said in a statement.
S&P stated that unless the South African government takes measures to control the fiscal deficit and fast track reforms, debt is unlikely to stabilize within S&P’s three-year forecast period.
The agency warned that it may lower the rating if it observed continued fiscal deterioration due to higher pressure on spending, rising interest costs, or the crystallization of contingent liabilities related to state-owned enterprises, especially Eskom, the country’s major electricity provider.
S&P however acknowledged the work the government has started doing to restore the credibility of the country’s weakened institutions, including the reinvigoration of the National Prosecuting Authority and South African Revenue Service.
Furthermore, the agency acknowledged the credibility of the South African Reserve Bank and the flexible exchange rate regime to be key strengths supporting the country’s ratings.
In November 2017, S&P downgraded South Africa’s credit rating to junk. Of the three major international credit rating agencies, only Moody’s still keeps South Africa at investment grade.
Earlier this month, Moody’s changed its outlook on South Africa’s credit rating to negative.
S&P said on Friday that it would be closely monitoring the country’s economic performance to see if it weakens further.
“We could also consider lowering the ratings if the rule of law, property rights, or enforcement of contracts were to weaken significantly, undermining the investment and economic outlook. We currently view this as unlikely,” the agency said. Enditem