Can South Africa avoid another credit rating downgrade?

Threatened by recession and ratings downgrades to “junk” status, South Africa has its work cut out to restore confidence in its economy.

South Africa’s Finance Minister Pravin Gordhan unveiled a budget on Wednesday aimed at winning over ratings agencies, which are poised to downgrade the country’s debt to junk status.

Speaking before he delivered his budget, Gordhan said South Africa's economy, which is battling shrinking growth, high unemployment and widespread poverty, was "in crisis".

The International Monetary Fund, the World Bank and South Africa’s central bank predict growth will fall below 1% this year – too low to make serious inroads into unemployment, which stands at 25%.

Slow economic growth and rising debt have prompted credit ratings agencies to downgrade South Africa’s credit worthiness. In December, Fitch cut its rating by one notch to BBB-, the lowest investment grade category, while Standard & Poor’s (S&P) kept its BBB- rating, but lowered its outlook from stable to negative.

Meanwhile, the rand fell almost 10% in December after President Jacob Zuma fired two finance ministers in less than a week. With the currency plunging, Zuma brought in Gordhan who served as finance minister from 2009 to 2014.

The move restored investor confidence, but Gordhan is faced with the difficult task of balancing the demands of investors and the ratings agencies with those of voters ahead of local government elections this year.

In his budget he included moderate tax hikes, cuts to government spending and announced greater cooperation with the private sector in an effort to boost growth.

In a briefing on South Africa’s economic outlook at the World Economic Forum’s Annual Meeting last month, Gordhan described the forecast for 2016 as “fairly dismal”, but added that the South African government was working to tackle the country’s economic challenges.

“We have worked hard as a government to understand our current environment, understand its challenges, and begin to ask ourselves some tough questions about what we need to do differently,” he said.

“South Africa is part of the commodity-producing countries. The emerging markets are currently under stress because of a variety of things that are happening and a global environment that’s volatile.

“Lots of corrections are taking place that have either intended or unintended effects in the financial sector and elsewhere in the real economy, which result in greater uncertainty – particularly for the business sector.”

He added: “A lot of the focus of our work is about how we create greater confidence among foreign investors in the debt market but also in the real economy, in particular among South African business.”

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