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South Africa Edges closer To Junk Rating, Recession After Rand Plunge

South Africa Edges closer To Junk Rating, Recession After Rand Plunge

In June last year global credit rating agencies Fitch and Standards & Poor’s (S&P) cut South Africa’s Economy credit standings to just a level above junk status as the country struggled with an array of both external and internal factors.

The downgrades were driven mainly by slowing GDP growth, which makes South Africa more vulnerable to capital outflows, rand depreciation, and rising budget and current account deficits (among other factors).

In a shocking move on Monday, the rand fell nearly 9 percent intraday to a new record low as investors worried about how a Slowdown in China’s economy – South Africa largest trade partner – will affect the local economy ahead of municipal elections later this year.

According to a Bloomberg report, this could be the final push over the junk rating and recession cliff that South Africa has been hanging on for most of last year.

“I have no doubt in my mind that we will be downgraded to sub-investment grade,” George Herman, head of South African investments at Citadel Investment Services, told Bloomberg.

“The reality is that our fundamentals, which were already under pressure last year, have now been pushed over the tipping point by the dramatic weakening of the exchange rate.”

If it eventually happens, this will be the first recession since the Apartheid regime ended some two decades ago.

The Africa’s  most industrialized nation, is faced with lethargic energy crisis due to its aging power grid, labor unrest in the mining industry which has been hurt by lower commodity prices on the international market and other contagion side-effect from an economic slowdown in china and strengthening US market.

At one point President Jacob Zuma, who investors have lost confidence in after a series of gaffes that saw him change the country’s Finance Minister twice in a week in December, termed the economy as “sick”.

“In South Africa, we’ve reached a fork in the road. If the government goes down the populist route, we will see more depreciation, but if it decides to tighten the rand, we could still see a turnaround,” Mike Keenan, a regional currency analyst for Barclays PLC in Johannesburg, told The Wall Street Journal.