South Africa May Fall Further into Junk as S&P Likely to Cut Outlook

This week, could see South Africa falling even further into junk as it looks like it is about to lose its only stable outlook on its credit ratings. 

In a Bloomberg survey, 16 economists out of 22 think that S&P Global Ratings will change its outlook to negative on Friday. S&P already hold South Africa’s foreign currency debt at two levels below investment grade and another downgrade could be on the horizon. 

This follows Moody’s Investors Service changing its outlook to negative a couple of weeks ago after the Finance Minister, Tito Mboweni described that due to the billions being spent to bail out Eskom, the fiscal outlook is rapidly deteriorating.

In May, S&P warned in its assessment that continued fiscal deterioration, mounting external financing pressures and structurally weaker economic performance could prompt the rating service to lower the nations credit assessment. 

So What is the Rating Risk

If there is a further downgrade, it will take the country even longer to recover its investment grade status at S&P. Also, Moody’s investment grade will look more out of alignment with S&P and Fitch Ratings.

For the current credit rating from Moody’s to remain unchanged there will need to be a real fiscal strategy that aims to contain the rise in debt. 

In a Bloomberg survey, 86% of economists said that Moody’s will take South Africa to junk next year.

A downgrade by Moody’s will force South Africa out of the FTSE World Government Bond Index, which could spark sell offs and outflows of $15 billion according to the Bank of New York Mellon. It will also increase the borrowing costs and make it even more difficult for government to finance the budget. 

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