SOUTH Africa is at risk of a further credit rating downgrade by all three of the top global rating agencies — Moody’s, Standard & Poor’s and Fitch, Bank of America Merrill Lynch (BofA Merrill Lynch) said on Monday.
The bank’s warning followed the decision by Moody’s to downgrade South Africa by one notch to Baa1 last week, and to keep a negative outlook on the rating over what it described as "policy uncertainty" ahead of the elective conference of the African National Congress (ANC) in December.
Credit ratings matter as they help determine a country’s cost of borrowing and affect investor appetite for local assets.
"South Africa is clearly at risk of a further downgrade by at least one of the rating agencies, and possibly all three," Bank of America Merrill Lynch said in a statement.
"The potential triggers are a faster than expected slowdown in economic growth that negatively impacts public finances, and/or unfavourable political developments."
The bank predicts growth in South Africa will slow to 2.4% this year from 3.1% last year, and quicken marginally to 2.9% next year.
These are both below consensus forecasts and the Treasury’s estimate of 2.7% this year and 3.6% next year.
"In our view, any negative developments around ANC economic policy in December could act as a trigger for further ratings downgrades, with Moody’s emphasis on the political backdrop implying it may be a potential first mover," Bank of America Merrill Lynch said.
It pointed out that six out of nine provincial ANC structures supported outright nationalisation of mines.
Another possible trigger for a downgrade was evidence of "delayed fiscal consolidation" as there was limited room for fiscal manoeuvre as the economy slows, putting pressure on tax revenues.
This could lead to a rating downgrade after the Treasury’s medium-term budget policy statement this month or the government’s February 2013 budget, the bank added.
Bank of America Merrill Lynch said it expected the Reserve Bank to trim interest rates by half a percentage point at its next policy meeting in November as economic growth slows.