Can South Africa survive its credit rating decline?

PUBLISHED: Thu, 20 Apr 2017 10:53:22 GMT

Content presented by IG Forex Trading 

The notion of national debt is nothing new in the modern age, as even developed economies have become encumbered in the wake of the Great Recession. The U.S. currently has a gross national debt of $18.96 trillion, for example, and this is unlikely to decline significantly in the foreseeable future.

In this respect, South Africa’s national debt level of R2.2 trillion ($1.5 trillion) may not seem too outlandish, but this represents 49% of the overall GDP and continues to underpin ongoing uncertainty and volatility within the region. It is these factors that have caused S&P Global to downgrade the nation’s credit ranking from BBB- to BB+, which is colloquially referred to as ‘junk’ status.

Why Has This Happened, and How Can South Africa Recover?

Fitch became the second major agency to reduce South Africa’s sovereign credit rating to junk status recently, reinforcing the decision by S&P and highlighting the challenges facing the government. Both agencies justified their decisions by citing the recent dismissal of finance minister Pravin Gordhan, as part of a controversial and knee-jerk cabinet shift that reflected the chaotic leadership of President Jacob Zuma. This type of decision making has caused widespread volatility and divisions within the government, making it almost impossible for the African National Congress (ANC) to drive stability and much-needed policy continuity.

All is not lost for South Africa, however, as a viable (if potentially lengthy) path to redemption remains. This relies on the status of the nation’s local currency credit, which accounts for 90% of South Africa’s total debt and for now continues to carry an investment grade rating. The government must therefore focus on taking the necessary steps to preventing the local currency credit rating from sinking to junk status, as this will help to maintain liquidity and lay the foundations for future growth.

According to IG’s trading forex analyst Shaun Murison, there are some elementary steps that the South African government can take to achieve this crucial goal. “The first step in recovery would be to restore political certainty within the country and prove continuity in treasury’s policy and previously planned budget,” he said. “These are some of the primary factors which have been cited as reasons for the downgrade and therefore become obvious first points of call.” This means creating a stable cabinet and establishing a long-term economic policy, which is focused on driving incremental growth, increasing the value of local currency and optimising the amounts that can be reinvested into the public sector.

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