Junk Status Still Hangs Over South Africa

Although South Africa avoided a downgrade to non-investment grade, or junk status, in 2016, the country is not yet out of the woods and may be downgraded this year. The reasons for this are ongoing political risk as factional battles in the governing African National Congress intensify, policy inconsistencies and low economic growth.

The effects of a sovereign credit rating downgrade would be significant for all South Africans. It would drive up borrowing costs, which in turn would have a negative impact on the government’s finances. It could also lead to foreigners leaving South Africa’s capital markets as well as driving the rand weaker. And it would in-turn push interest rates up, which would hurt ordinary South Africans, enca reported.

But there are some possible steps the country can still take to avert a downgrade. These would include underscoring that Finance Minister Pravin Gordhan is secure in his job, and cutting wasteful expenditure.

South Africa’s public debt stands at 50.1% of the country’s GDP, nearly double what it was in 2006. If the government’s borrowing position is not controlled it runs the risk of running up debts that it can’t service. An over-borrowed government is also perceived to be risky, which increases the cost of additional borrowing because lenders demand a premium. On top of this, the country’s treasury is under pressure from low revenue collection as a result of the slowing economy.

A downgrade to junk status is also likely to trigger significant capital flight. This is because sovereign downgrades typically have a direct impact on bonds and other fixed income securities making them less attractive to foreign bond investors.