Fitch retains its junk rating for SA
The agency warns financial challenges at state-owned enterprises remain substantial and government debt has yet to stabilise
Ratings agency Fitch Ratings has lifted its forecasts of SA’s economic growth rate but has kept its subinvestment-grade (junk) rating on SA, citing low growth and risks to public finances, as well as the risks that “the highest inequality in the world” pose for economic policy.
In an update on Friday, Fitch struck a relatively positive note, pointing to a recovery in governance and a “mild cyclical recovery”, and increasing its growth forecast for 2018 from 1.6% to 1.7% and for 2019 from 2% to 2.4%. However, it warned financial challenges at state-owned enterprises remained substantial and government debt had yet to stabilise.
Fitch said it could downgrade if fiscal deficits widened or a large part of SOE debt migrated to the sovereign balance sheet, or if SA’s foreign debt rose, but it could upgrade if the budget deficit narrowed to levels that would reduce the state debt ratio or if the trend economic growth rate strengthened.
Though Fitch cited the speed with which Cyril Ramaphosa had taken office as president of SA as a positive, which avoided a period of competing power centres, Fitch sovereign analyst Jan Friederich said policy making could still be hindered by significant tension within the ANC and by the fact that policy makers would be preoccupied with 2019’s election.
The agency expressed scepticism about how fast and how effectively government reform initiatives would improve growth, and while it said land reform would likely be handled to avoid significant economic damage, Friederich said “the policy will focus investors minds on the more general risks to property rights resulting from high inequality”.
Fitch cut SA’s local and foreign currency ratings to one notch below investment grade at BB plus in April 2017, immediately after the cabinet reshuffle in which former president Jacob Zuma substituted Malusi Gigaba for Pravin Gordhan at the finance ministry.
However, the agency then put SA’s rating on a stable outlook and on Friday reaffirmed this. For the first time in several years, all four major rating agencies now have SA on a stable outlook, indicating they do not intend to upgrade or downgrade unless there is a significant change. But while Fitch and S&P Global have junk ratings on SA, Moody’s and Japan’s R&I have maintained their investment-grade ratings.
Fitch’s forecasts of SA’s government debt ratio (including local government) are slightly more optimistic than Treasury’s, at 58% in 2019-20, but higher than the BB median of 49%.
Treasury said on Friday tangible progress had been made on most of the government’s 14 confidence-boosting measures and this should “translate into improved investor confidence”.