Junk Status Rating Scare For South Africa

South Africa under Fire from Credit Ratings Agencies…..

Analysts speculating on the South African economy are of the opinion that the financial markets have already factored in a possible junk status downgrade for the country. Standard & Poor’s will be presenting its review on SA’s credit status on Friday 3 June 2016. It is expected that the credit ratings agency will delay taking action for a period of 6 months on the proviso that the South African government, labour unions and the corporate sector will work hard towards economic growth in the country. Failing that, Standard & Poor’s will be forced to downgrade South Africa’s sovereign credit rating to junk status at its next meeting in December.

Credit ratings agency, Moody’s Investors Service recently made a decision to maintain South Africa’s credit rating 2 rungs above what is considered sub-investment-grade status. Moody’s placed the South African economy on review for a downgrade in March 2016. The credit ratings agency has been fair in affording South Africa wiggle room to rectify its financial position. The Minister of Finance, Pravin Gordhan has used the possibility of a sovereign credit downgrade as a reason to work harder towards remedying the issues in the economy. For its part, Standard & Poor’s has South Africa just a notch above junk status, and the credit ratings agency is deeply concerned about the country’s economic growth prospects.

Problems Plaguing South African Economy

The managing director of S&P for sub-Saharan Africa, Mr. Reuss alluded to several reasons why the agency is concerned about South Africa’s economic status: heavy reliance on FDI inflows and poor economic growth for the country. Since the last review of South Africa’s economic performance in December 2015, S&P is of the opinion that economic growth remains a major concern for South Africa. In 2015, prospects for 2016 GDP were 1.7% per annum, however that forecast has now nosedived to just 0.6% for the current year. Among others, South Africa is plagued by tremendous political upheaval and uncertainty with the scandal involving President Jacob Zuma and the notorious Gupta family. Other issues that remain front and centre are the power outages taking place at all too regular intervals (Eskom), persistently low commodity prices brought about by weak global demand, and drought conditions.