The recent downgrade to junk of South Africa’s emerging market peer Brazil is a timely warning that ratings agencies and investors will not hesitate to punish signs of unwieldy budget deficits on a prolonged basis.
Zambia, whose currency skidded nearly 20% earlier this week after Moody’s cut its rating will give South Africa’s Finance Minister Nhlanhla Nene cause for nervousness as he prepares his medium-term budget due later this month.
Unlike Brazil, which now holds an investment rating from only Fitch after downgrades from Moody’s and Standard & Poor’s, South Africa still has a favourable standing with all three agencies.
But any signs that Nene is struggling to rein in a budget deficit hovering around 4% of GDP could raise a red flag.
Fitch warned on Sept. 8 that the risk of a downgrade was increasing, citing a largely negative news flow this year, which has included chronic electricity shortages and a sharply weaker rand currency.
“I believe the risk of a downgrade by Fitch in December is quite high,” said Macquarie First South Securities economist Elna Moolman.
“For now, our investment grade ratings are secure. However, in the long term it requires commitment to fiscal consolidation to preserve this status.”
Fitch rates South Africa at BBB with a negative outlook and could take it down a notch if Nene fails to impress in his Oct. 21 medium-term budget policy statement.
The slippery slope for South Africa lies in its debt-ridden state firms which face billions of rand in funding shortfalls, although Nene has vowed that any government support will be budget neutral, mostly through guarantees on loans.
