South Africa avoids junk in June, but S&P warns a 2016 downgrade still possible

3rd June 2016 By: Terence Creamer - Creamer Media Editor

South Africa avoids junk in June, but S&P warns a 2016 downgrade still possible

Ratings agency S&P Global Ratings announced on Friday evening that it had decided to affirm its long- and short-term 'BBB-/A-3' foreign currency and 'BBB+/A-2' local currency sovereign credit ratings on the Republic of South Africa.

The much-anticipated decision meant that Africa's most developed, but also one of its slowest growing economies, had avoided being downgraded to a subinvestment-grade, or junk, status.

Some commentators had warned that the downgrade itself carried the risk of tipping South Africa into a recession. As things stand, few economists expect the economy to grow by much more than 0.5% in 2016.

However, S&P sustained its negative outlook, which it said reflected the potential adverse consequences of low gross domestic product (GDP) growth and signalled that it could still lower South Africa's rating later in the year, or if proposed policy measures did not turn the economy around.

"Low GDP growth is putting South Africa's economic metrics at risk and could eventually weaken the government's social contract with business and labour," the agency said in a statement.

It added that rising political tensions were also accentuating vulnerabilities in the country's sovereign-credit profile.

These negatives were offset by improvements in the energy sector, which "will likely reduce some of the economic bottlenecks".

In addition, "pending finalisation of labour and mining reforms could engender a positive confidence shock".

"On the fiscal side, the government is showing greater resolve to reduce fiscal deficits at a faster pace than we expected," S&P said.