Nicolette Dirk, finance writer, Justmoney.co.za
Two ratings agencies gave South Africa the thumbs down last Friday.Fitch revised South Africa’s outlook to negative from stable, saying the country’s growth outlook has deteriorated.
This will make it challenging to reduce the budget deficit.
Later that day Standard & Poor’s (S&P) downgraded South Africa’s credit rating from 'BBB' to 'BBB-' and the long-term local currency rating to ‘BBB+’ from ‘A-‘.
In addition, S&P revised South Africa’s outlook to stable from negative. S&P’s main reasons for revising down South Africa’s rating arise largely from slow GDP growth, the platinum strike and the risks this might pose for the fiscal consolidation path.
In a statement government acknowledged the negative impact that the strike has had not only on mining output, but also on industries that have linkages to the sector as suppliers of goods and services and those that process raw materials supplied by the affected mines.
"It is for this reason that government did everything in its power to support efforts aimed at resolving the strike,"they said.
Ahead of S&P's announcement, economist, Dawie Roodt, said that should a second rating agency also downgrade the local currency rating, it spells trouble for the country's economy.
“There are two types of investment grades used for countries. A non-investment grade means that the country is not an attractive investment hub and an investment grade means that it is still viewed as an attractive investment potential. We are only two notches into the investment grade which means we are in trouble. If we fall out of this grade, South Africa won’t be seen as a good investment option,” said Roodt.
Factors impacting South Africa’s grading
National Treasury stated that Fitch’s concerns about growth arise partly from the strike that has affected part of the mining sector. Efforts to bring an end to the strike continue and government has called on all parties to seek an end to the deadlock.
Government now plans to prioritise the accelerated implementation of the National Development Plan (NDP), with reforms that are aimed at unlocking South Africa’s growth potential.
Government plan to redouble its efforts to improve the regulatory environment, reduce the skills shortage and accelerate its infrastructure investment programme so as to reduce the bottlenecks constraining growth.
Roodt said that despite not being a fan of the NDP, it is better than what is currently in place. But he did question whether our current government has the potential to implement it effectively.
“To solve our problem is easy. We need a smaller state that won’t stand in the way of the private sector. The civil servants we currently have are a wet blanket to the economy. Too many of them are overpaid and underworked,” said Roodt.
Should South Africa be downgraded further it means that the government will have harder time borrowing money, and if it does manage to do so it will be charged more interest as South Africa is perceived as a risk to lend to following the downgrades.
Roodt added that a weakening currency and low growth prospects spells trouble for consumers already battling with the rising cost of living.