JOHANNESBURG, Nov 24 (Reuters) - South Africa's failure to stabilise the country's fiscal situation could see its credit rating downgraded deep into junk territory, the central bank said on Friday, just hours before two rating agencies were due to announce their decisions.
Africa's most industrialised economy is on the brink of losing its investment-grade ranking on local currency debt from Moody's and S&P Global Ratings. Both rate it on their lowest investment grade rung of Baa3/BBB-minus.
South African Reserve Bank deputy governor Daniel Mminele told an investor conference the sharp sell-off in local currency and domestic bonds recently was a clear indication of investors "nervousness about South Africa's rising economic and fiscal risk".
He cited the dismal October budget, where Finance Minister Malusi Gigaba said the budget deficit estimate had widened to 4.3 percent of gross domestic product from 3.1 percent and that gross debt would reach 60 percent of GDP in 2021, as major ratings risks.
"This mixture of weak growth and rising debt – the two concerns repeatedly flagged by ratings agencies – suggests that South Africa must increasingly be wary of possible further downgrades to its sovereign ratings," Mminele said.
A one-notch cut of the local-currency rating by Moody's and S&P is set to trigger forced selling of up to $12 billion of the country's bonds as index-tracking and rating-constrained funds are forced to sell.
Offshore investors own nearly half of Pretoria's total debt, leaving the country heavily reliant on capital inflows to plug budget deficits, which are set to widen as growth disappoints and political uncertainty raises the cost of borrowing.
On Thursday, the central bank left lending rates unchanged for a second consecutive meeting after easing them in July, citing the heightened threat of downgrades and uncertain policy outcomes of the African National Congress's leadership contest.
The ruling party's conference in December is set to elect a successor to President Jacob Zuma as its head. Spats between contending factions have spilt over into the public and raised fears that policy will take a backseat to the power struggles. (Reporting by Mfuneko Toyana; Editing by Olivia Kumwenda-Mtambo and Ralph Boulton)