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The Impact of South Africa’s Credit Rating Downgrades

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A lacklustre 2016, which saw South African GDP shrink by 0.3%, has been followed by a series of political own goals in 2017. The disastrous cabinet reshuffle, which culminated with the axing of finance minister Pravin Gordhan, ended with the inevitable rating downgrades. Days after the dismissal of Gordhan, both Fitch and Standard & Poor’s downgraded South Africa’s credit rating to BB+, a non-investment grade, which may have severe implications for the South African economy.

The short-term impacts of this have already resulted in an increase in public borrowing costs, and the pressure on public funds is magnified by lower than projected GDP growth. In the medium to long term, a number of other scenarios may play out, including further increased borrowing costs and currency impacts.

The ratings downgrades may also jeopardise key public infrastructure projects and lead to further losses in investor confidence, which has plunged from the buoyant levels seen throughout 2013 and 2015.

As it stands, South Africa currently sits at the bottom of the AT Kearney global FDI Confidence Index and risks losing its place in the index altogether. Further downgrades would see South Africa dropped from widely used global bond indices, with JP Morgan already having removed South African bonds from their own. 

Regaining investment status for South Africa is certainly no formality and looks very unlikely to occur without sweeping political changes. While Brazil took 12 years to regain its investment status, a quick comeback is certainly possible, as shown by Thailand and South Korea who both recovered in under two years. 

Unfortunately, the ripple effects of the potential investment flight from South Africa and hits to the country’s infrastructure may also threaten the growth prospects of neighbouring nations. However, perhaps most galling of all, is that it was all self-inflicted.

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