Credit downgrade could see 1.2% GDP contraction by 2018

Cape Town – Finance Minister Malusi Gigaba is alive to the fact that the rand could very well be downgraded by ratings agencies in the near future.

During a media conference ahead of his Medium-term Budget Policy Statement on Wednesday, he said he couldn’t speculate on whether ratings agencies will hold off on a further downgrade.

“We’re having a conference with ratings agencies later today,” Gigaba told journalists, “and there will be further meetings in the coming days. We are certainly going to talk candidly about our challenges and how we can get ourselves out of these challenges.”

National Treasury’s mini budget depicted two scenarios, should South Africa’s local currency debt be downgraded.

If the local currency is downgraded, there’s a moderate increase in South Africa’s risk premium and gross domestic product growth could slow to 0.6% in 2018 and 0.9% in 2019.

A large increase in the risk premium could mean GDP growth will contract by 1.2% in 2018 and 0.8% in 2019, National Treasury said in the mini budget.

Gigaba said if South Africa breaches its expenditure ceiling - a very real possibility if government does not sell off core and non-core state assets - ratings agencies will lose confidence in the country. 

"If we can't maintain the ceiling now, what confidence should ratings agencies and investors have that we’ll maintain the fiscal framework we’ve outlined?" he said.  

Ratings agencies Standard & Poor and Fitch downgraded South Africa’s foreign currency rating to junk status earlier in April this year. S&P however still kept the local currency debt at one notch above junk.

Moody’s kept South Africa at investment grade during its June ratings review, but has indicated a number of times that the country is at risk of a downgrade.

A downgrade of the local currency debt, by either Moody’s or S&P, would put South Africa at serious risk of exiting the World Government Bond Index, which could lead to portfolio outflows of between R80bn and R100bn. 

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