South Africa has moved one step closer to a junk bond status after Fitch Ratings and Standard & Poor’s (S&P) both releasing their sovereign credit rating reviews on the country on Friday, December 4.

After having the country’s rating on a negative outlook since June 2014, Fitch decided to downgrade South Africa’s government debt risk to “BBB-” with a stable outlook, which is one level above junk status.

Fitch noted the country’s building growth constraints, adding that it lowered its GDP growth forecast to 1.4% for 2015 (from 2.1% in the previous review in June 2015) and to 1.7% for 2016 (from 2.3%).

Moreover, the rating agency said the downgrade stemmed from expectations that government debt (as a ratio to GDP) will rise to double its 2008/09 level and to eight percentage points above the “BBB-” mean this year.

Fitch also highlighted the challenges to reducing the fiscal budget deficit and high levels of contingent liabilities (e.g. guarantees to Eskom).

The fourth trigger was the country’s persistent current account deficit despite weak domestic demand and a sharp depreciation of the rand which combined should have translated into further improvement in the trade balance.

Finally, the rating agency stated that the National Development Plan (NDP) has not delivered any rapid or material improvement in the business environment and medium-term GDP growth prospects.

Fitch said that South Africa will see more negative rating action if the National Treasury decides to loosen fiscal policy, such as upward revisions to expenditure ceilings, which leads to failure to stabilise the ratio of government debt to GDP.

Moreover, further marked weakening in the GDP growth trend and rising net external debt to uncomfortable levels will put the rating under pressure.

In turn, South Africa could see positive rating action, however improbable, if there is sustained improved growth performance (on the back of successful implementation of growth-enhancing structural reforms), marked narrowing in the budget deficit and a reduction in the ratio of government debt to GDP, a narrowing of the current account deficit, and improvement in the country’s net external debt to GDP ratio.

In turn, S&P affirmed its “BBB-” rating for the South African sovereign on Friday, but placed the country on a negative outlook due to expectations that GDP growth will likely come in below current projections.

S&P said it expects GDP growth to remain around 1.6% in 2016, and only increase above 2% from 2017 as capacity of electricity supply improved. '

S&P added that the country’s fiscal flexibility might suffer from contingency risk from state-owned enterprises (SOEs) with weak balance sheets.

The National Treasury issued a response to the negative rating action in which it listed the State’s perceived and planned achievements, and reiterated its commitment to reducing the binding constraints on the economy, thereby placing it on a higher growth trajectory.

Bart Stemmet, Analyst at the NKC African Economics, said that this message sounded very familiar.

“The negative rating action was widely expected, especially the downgrade from Fitch. The rating agencies’ concerns are certainly valid, with the glacial pace of structural reform digging the hole that the economy finds itself in ever-deeper. Although Finance Minister Nhlanhla Nene has done his best with the cards he has been dealt, the slowing GDP growth environment has pushed him into a corner and concern over government debt has escalated.”

“There is a growing consensus that a deep crisis would need to occur to shake the jaded government to life. Brave leadership is needed to drive the deep structural reforms needed to put the South African economy back on track, but one wonders whether the spectre of being rated ‘junk’ would be enough to spark such a drive,” he said.