S&P keeps SA rating on hold, maintains negative outlook

Good day, Here are some thoughts from Nazmera on the S&P decision to keep the SA rating on hold, with negative outlook.  Report attached.  Fitch due next Wednesday.  They are currently BBB- with a neutral outlook.  A full table of SA’s ratings is at the bottom of this email.  S&P kept South Africa’s long-term hard currency sovereign debt rating on hold, while maintaining the negative outlook they initiated on December 5th last year (before the Des debacle) The local currency rating was also maintained two notches higher at BBB+ (90% of the SA govts debt is denominated in ZAR and this is the rating that matters for WIGBI inclusion).  No change is expected to narrow this gap in the near future as S&P notes that they “believe that the sovereign's flexibility in its own currency is supported by the SARB's independent monetary policy, a large and active local currency fixed-income market, and a prudent fiscal policy.” However, S&P are pretty clear that steps need to be taken to ensure an improvement in the growth outlook to avoid a downgrade either in December 2016 or in 2017.  While S&P acknowledged the cyclical and external factors hurting SA growth (drought, commodity weakness), they were clear that more needs to be done by the government to address the structural constraints to growth.  The three key factors S&P are watching for December are: if GDP growth does not improve in line with their current expectations (S&P has: 2016: 0.6%, 2017: 1.5%, 2018: 1.8%) if we believed that institutions became weaker due to political interference affecting the government's policy framework if net general government debt plus government guarantees to financially weak government-related entities together surpass 60% of GDP throughout our forecast period through 2019. As Peter Kent pointed out, the difference between their December 2015 outlook and the June 2016 outlook is that they now cited political meddling in institutions is in for June 16 as a downgrade factor, and have removed the Dec 2015 references to external imbalances.  Given the slow but steady correction in the current account deficit, that appears to be less of a concern.  S&P were quite explicit on what needed to be done: Reliable energy provision by including the private sector Labour reform Implement a clear mining code that promotes investment The bulk of the report was surprisingly positive.  If we count the number of words discussing positives in SA vs negatives, the positives seem a bit ahead.  The report cited South Africa’s strengths – strong democracy, independent media, Public Protector, independent judiciary, improved fiscal discipline, relatively limited contingent liabilities, the floating exchange rate, independent central bank, etc.  The S&P report could have been written by the National Treasury.  If the rest of government takes this report seriously, it supports all the stances that they have taken.  June 16 Outlook The negative outlook reflects the potential adverse consequences of low growth and signals that we could lower our ratings on South Africa this year or next if policy measures do not turn the economy around. We could lower the ratings if GDP growth does not improve in line with our current expectations, or wealth levels continue to decline in U.S. dollar terms. We could also lower the ratings if we believed that institutions became weaker due to political interference affecting the government's policy framework. Downward rating pressure would also mount if net general government debt plus government guarantees to financially weak government-related entities together surpass 60% of GDP throughout our forecast period through 2019. A reduction in fiscal flexibility could also lead us to narrow the gap between the local and foreign currency ratings. We could revise the outlook to stable if we observed policy implementation leading to improving business confidence and increasing private sector investment, and ultimately contributing to higher GDP growth. Dec 15 Outlook The negative outlook reflects our view that GDP growth might be lower than we currently expect; for instance, due to persistent electricity shortages, continued weak business confidence, or labor disputes escalating again. The outlook also reflects our view that fiscal flexibility might reduce owing to contingency risks from state-owned entities with weak balance sheets. We could lower the ratings if GDP growth does not improve in line with our current expectations, or if state-owned enterprises require higher government support than we currently expect. We could also lower the ratings if external imbalances increase, or funding for South Africa's current account or fiscal deficits becomes less readily available. Areduction in fiscal flexibility could also lead us to lower the local currency ratings, potentially by more than one notch. We could revise the outlook back to stable if we observe policy implementation leading to improving business confidence and increasing private sector investment, and ultimately contributing to higher GDP growth. Read More here about the S&P Global Ratings -  https://goo.gl/e5x65Z