South Africa
South Africa downgraded to junk status

S&P Global Ratings has lowered its credit rating of South Africa to what is known as junk status.

The downgrade reflects their opinion of the further deterioration of South Africa’s economic outlook and its public finances.

In our view, economic decisions in recent years have largely focused on the distribution – rather than the growth of – national income.

As a consequence, South Africa’s economy has stagnated and external competitiveness has eroded.

We expect that offsetting fiscal measures will be proposed in the forthcoming 2018 budget in February next year, but these may be insufficient to stabilize public finances in the near term, contrary to our previous expectations,” said S&P in a statement.

Political risks and continued economic underperformance constrain the ratings.

The following concerns were mentioned by S&P

• A political agenda has overshadowed policy making, despite the deteriorating economy and weakening public finances.
• South Africa’s economic growth performance is among the weakest of emerging markets sovereigns, with less than zero per capita growth.
• Income inequality is among the highest in the world and has worsened since the turn of the century.

Excluding agriculture and mining, South Africa’s services-dominated economy is barely growing.

The private sector is investing less than the depreciation of the capital stock. On a per capita basis, consumption is declining.

Despite close to 40% depreciation in the nominal effective exchange rate since September 2007, exports of manufacturing and other non commodity sectors have been sluggish.

This is the case even though the global economy is improving.

The rand slumped from 13.88/USD to 14.17 and is expected to further weaken.

What does junk status mean?

* South Africans could pay higher interest rates and the cost of debt increases.
* International credit costs will increase, which means a decrease in funding for infrastructure spend.
* The Rand may decline, causing inflation to rise.
* The country’s economy will more than likely slow down due to the downgrade.
* We could also see a possible prime lending rate increase.

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