Cape Town - Fitch Ratings has dropped South Africa's outlook to negative, while affirming the country’s rating at BBB-, which is one notch above junk status, it said on Friday.

"The issue ratings on South Africa's senior unsecured long-term foreign- and local-currency bonds have also been affirmed at 'BBB-'. The Country Ceiling has been affirmed at 'BBB'. The Short-Term Foreign and Local Currency IDRs and the issue ratings on senior unsecured short-term local currency securities have been affirmed at 'F3'. The rating on the RSA Sukuk No. 1 Trust has also been affirmed at 'BBB-', in line with South Africa's Long-Term Foreign Currency IDR."

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The revision of the outlooks on South Africa's long-term IDRs to negative was driven by factional battles within the ANC, government debt, debt from state-owned enterprises (SOEs) and low GDP growth.

"The in-fighting within the ANC and the government is likely to continue over the next year."



In Fitch's view, this will distract policymakers and lead to mixed messages that will continue to undermine the investment climate, thereby constraining GDP growth.



It noted that while the economy may have started recovering from a series of shocks, business confidence remains depressed and investment has continued to contract.



"We expect only modest GDP growth of 1.3% in 2017 and 2.1% in 2018, although this is an improvement from 0.5% in 2016."



The economy had been hit in 2015 and 2016 by electricity shortages, the worst drought in decades, a sharp fall in international prices for some of South Africa's main mining commodities and rising policy uncertainty.

Fitch said debt of SOEs remains an important contingent liability to the sovereign.



"Debt of the nine major SOEs amounted to R743bn (18.2% of GDP) at end-March 2016, of which R280bn was subject to government guarantees. In addition, the government provides guarantees on electricity prices to independent power producers complementing Eskom's electricity generation."

The ratings agency noted that ANC factional battles may undermine government efforts to improve the governance of SOEs, which could affect the plan to stream-line the SOE portfolio.



"The plan to build nuclear power stations has run into substantial opposition because of concerns about governance. As a result, the government announced in November that the first plant will not be commissioned until 2037, alleviating concerns over any medium-term fiscal impact."

Fitch pointed out that a downgrade could result owing to continued political instability, failing to stabilise the government debt/GDP ratio, failing to grow the economy and rising net external debt to levels that raise the potential for serious financing strains.

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