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Emerging MarketsAfrica

South Africa under ratings pressure, but upside potential also huge

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South Africa is having rating trouble, and it looks serious. Since Friday, it is teetering on the edge of investment grade at both Standard & Poor’s and Fitch, a big problem for a country with a lot of infrastructure to build. But South Africa’s woes don't go too deep, and the country's growth could bounce back quickly.

Fitch cut South Africa’s credit rating one level on Friday to BBB-, the lowest notch in investment grade, and in line with the assessment of S&P, which lowered its outlook to negative from stable on the same day.

The country’s growth has taken a beating and is expected to continue to do so, as a power shortage is likely to constrain an expansion for the next two years. Fitch also said the government’s decision not to tighten fiscal policy in the face of weakening revenue and rising debt levels was a reason for the downgrade.

These are good, solid reasons for downgrading a credit rating, or setting it on negative outlook, as the agencies have done.

But it is always darkest before the dawn.

In Cape Town at the IMN’s African Capital Markets conference last month, South African GDP growth, or the lack of it, was discussed at length. 

The country this year adjusted its target for growth to a sluggish 1.5%, but it seemed widely accepted that South Africa should not be a country with growth at that low level. Some reckoned that Eskom’s troubles and the recurring job strikes have shaved a whole percentage point each off growth numbers this year.

Neither of these problems are easily fixed, but neither is intractable, and South Africa is working on it.

The troubled state is trying to constrain spending, but it is also painfully aware that to fix the power shortage problem, state-owned Eskom needs help and aging power infrastructure needs upgrading. That costs money — and not in small amounts.

Much like a corporate that has embarked on a make or break rescue decision, South Africa is forging ahead and putting faith in its own growth and its own abilities to fix the internal problems it is facing.

The ratings slap on the wrist was deserved, but the downwards rating trajectory should not hide the country’s huge potential.

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