South African economy at risk of downgrade to junk status?

South African economy at risk of downgrade to junk status?

As the country’s finance minister gives his mid-term budget, South Africa’s fiscal deficit may be larger than earlier forecast.

Summary:

  • A larger than anticipated fiscal deficit may be about to put South Africa’s credit rating on the verge of a downgrade to junk status
  • A survey of Bloomberg economists estimates the deficit will only shrink to 3% of GDP by 2019, despite the National Treasury targeting 2.4% in three years’ time
  • Will the trend of South African investors diversifying their portfolios with international assets continue in the face of ongoing domestic financial instability domestically?

It’s already flirted with it once in 2016, but is South Africa on the verge of being downgraded to junk status once again?

The country’s fiscal deficit may not narrow as quickly as the government had hoped, which would leave South Africa open to the risk of ratings agencies Fitch and Standard and Poor’s (S&P) taking action.

According to the median of 15 economist estimates compiled by Bloomberg, the current shortfall stands at around 3.4% of GDP. This is despite Finance Minister Pravin Gordhan in February predicting that the deficit would be at 3.2% for the year.

Worse still, the survey estimates that the deficit will only shrink to 3% of GDP by 2019, much less than the 2.4% the National Treasury had hoped and forecast.

“If there is a delay to their fiscal consolidation, from a strategic perspective, it would be quite fatal, because that would then pave the way for a downgrade,” explained Iraj Abedian, Chief Executive Officer at Pan-African Investments and Research Services.

In the summer, both Fitch and S&P spared South Africa from a downgrade to junk status, instead relegating it to the lowest investment grade possible. However, both are set to review their assessments by the end of the year.

Political strife, low commodity prices and one of the worst droughts for 100 years have thwarted the growth of South Africa’s economy. Over the past two years, there’s been a notable rise in South African investors moving more of their money into overseas assets to hedge against domestic volatility.

With Britain the largest booking centre for South African investment overseas, many choose the stability and high-returns found in the UK property market. The recent vote for Brexit, which has seen the value of the pound fall to a 31-year low against the dollar, has also created a huge opportunity for investors to acquire assets with greater affordability.

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