All eyes turn to S&P review of SA credit rating

According to Mohammed Nalla, ?Head: Strategic Research - Global Markets at Nedbank's Corporate and Investment Bank, the expectation is for S&P to maintain its current "BBB-"rating, which remains the most negative of the big three ratings agencies.

"In November 2014, Moody's rating was downgraded by 1 notch (after being 2 above S&P and 1 notch above Fitch) and has changed its outlook to Stable with a rating of Baa2 which correlates with the BBB rating of Fitch. Fitch Ratings changed its outlook on South Africa to 'Negative' in June last year and subsequently affirmed its view at its latest June 2015 review last week. S&P's BBB- rating remains 1 notch above sub-investment grade."

He says South Africa's credit rating has suffered from a series of downgrades over the last few years as sluggish global growth has compounded domestic structural frailties. "S&P downgraded the country in June 2014 and changed its outlook to 'Stable', but the lower rating leaves us on the cusp of sub investment grade. Current consolidation in our current account deficit and a degree of fiscal restraint as indicated in the most recent Budget announcement in February will be viewed positively.

This, coupled with a reasonable resolution to the public sector wage negotiations, and a relatively supported revenue profile and some growth uptick after 2014's performance, are all supportive of an unchanged stance at the current review. South Africa is also still considered to have strong institutional frameworks, which are seen as a positive."

Furthermore, Nalla says the energy crisis will erode growth potential while a weaker rand serves as an exogenous inflationary factor which will stifle household and business spending power, thereby inhibiting revenues in the medium term. "While Treasury's expectation of 2% growth this year is modest, it is more realistic, thereby decreasing the probability of missing the revenue target for the year."

According to Nalla, the current situation appears to be finely balanced. "The 'Stable' outlook by S&P may delay a move toward sub-investment grade and will likely afford the South African government and National Treasury the opportunity to address key considerations as well as reign in fiscal expenditures.