The South African economy has been experiencing low demand for exports and going through political turmoil that has weighed on its economy’s growth.
Sequentially, GDP declined an annualized 0.3% in the fourth quarter of 2016 and 0.7% in the first quarter of 2017. However, it grew 2.5% in the second quarter of 2017.
Rating Downgrade
S&P downgraded the country’s credit rating to junk status. It lowered South Africa’s local currency credit rating to BB+ from BBB. Moreover, the rating agency also lowered South Africa’s international debt rating by a notch to BB. S&P cited concerns over the country’s economic scenario and fears of further deterioration in public finances due to the weakness in GDP.
Moreover, Moody’s Investors Service put South Africa’s Baa3 rating in review for downgrade, as the rating agency expects a faster-than-expected rise in the government’s debt-to-GDP ratio, weaker growth prospects and expected shortfall in budget. The rand took a hit as a result of this.
Moody’s decision to put the rating in review instead of an immediate downgrade is a positive. A decision to downgrade might trigger local currency debt to exit various global bond indices.
What Lies Ahead?
South Africa’s finance minister Malusi Gigaba reduced the country’s growth forecasts for this year to 0.7% from 1.3% earlier. The recent downgrade might lead to a further reduction in foreign direct investment and investors fleeing the country.
South Africa’s unemployment rate came in at 27.7% in the third quarter of 2017, same as the previous quarter. Moreover, the country has been going through immense political turmoil. President Jacob Zuma was under scrutiny for maintaining illegal ties with the Gupta family and the firing of finance minister Pravin Gordhan.
Zuma survived the eighth no-confidence motion by opposition parties trying to unseat him. The motion fell short by just 24 votes. The opposition cited the result as a show of optimism and strength in their fight against the apparent corrupt practices of Zuma and a means to invigorate confidence in them to fight him in the courts.
