Rating agencies Moody’s Investors Service and S&P Global Ratings published their reviews late on Friday. S&P Global has now downgraded South Africa’s local debt to the highest non-investment grade (junk), which is the same level that it previously had South Africa’s foreign-currency debt.
S&P and Fitch both downgraded South Africa’s foreign-currency debt to the highest non-investment grade (junk) when Minister Gigaba was appointed in March 2017, citing the potential for a change in fiscal course. At that stage, S&P still left South Africa’s local currency debt on investment grade, but this has now also been reduced to junk status. The outlook is stable.
S&P commented that “The downgrade reflects our opinion of further deterioration of South Africa’s economic outlook and its public finances. In our view, economic decisions in recent years have largely focused on the distribution rather than the growth of national income.
Consequently, South Africa’s economy has stagnated and external competitiveness has eroded. We expect that offsetting fiscal measures will be proposed in the forthcoming 2018 budget in February next year, but these may be insufficient to stabilize public finances in the near term, contrary to our previous expectations.”
Moody’s Investors Service Moody’s took a softer stance, and is the only one of the three credit ratings agencies which is still assigning an investment grade rating to both the foreign currency denominated and local currency debt of the country. However, they announced that they have put the long-term issuer and senior unsecured bond ratings of the government of South Africa on review for downgrade.
Moody’s said: “The decision to place the rating on review for downgrade was prompted by a series of recent developments which suggest that South Africa’s economic and fiscal challenges are more pronounced than Moody’s had previously assumed.
Growth prospects are weaker and material budgetary revenue shortfalls have emerged alongside increased spending pressures. Altogether, these promise a faster and larger rise in government debt-to-GDP than previously expected.”
Moody’s downgraded SA’s sovereign ratings to the cusp of junk in June 2017, warning that the country could lose its investment-grade rating if its economic and fiscal strength continued to falter. A further credit rating downgrade by Moody’s would therefore take its credit rating on South African bonds also down to junk status.
On Thursday 23 November, rating agency Fitch announced it will keep its credit rating in respect of both foreign and local currency debt unchanged at BB plus, or junk status. It maintained a stable outlook for the country.
Effects of the S&P Global downgrade
Ian Matthews, Head of Business development at Bravura comments: “This outcome is more positive than if S&P Global and Moody’s both downgraded the local currency rating. If both Moody’s and S&P downgraded South Africa’s local currency debt to junk, South African bonds would fall out of the Citigroup’s World Government Bond Index (WGBI), causing large international tracker funds to sell out of their holdings of such bonds.
Ejection from the crucial bond indexes means passive investors mandated to invest in local bonds would automatically have to withdraw from those investments. Downgrades to sub-investment grade could trigger forced selling of up to as $14bn of outflows, according to the Bank of America. If S&P and Moody’s, therefore, both downgrade South Africa, then far greater losses on the Rand can be expected. The Rand could depreciate rapidly, causing inflation to increase, putting upward pressure on interest rates and downward pressure on economic growth.”
However, Matthews warns that S&P’s decision will see South Africa excluded from the Barclays Global Aggregate index, whose inclusion criteria requires investment grade rating on its local currency debt from any two ratings agencies. South African debt has already been dropped from one of the widely used global bond indexes, the JPMorgan Emerging Market Bond Index Global.
Foreign investors are already turning cold on South African bonds, data from the Johannesburg Stock Exchange show, with daily outflows over the past month averaging R134m.
Junk status means South Africa is going to have to pay more, to raise the money it needs for economic growth, key projects and service delivery. Interest rates will most likely rise, thus increasing the monthly cost on things like home loan and vehicle finance repayments.
Moody’s takes wait and see approach
Moody’s decided to place the South African debt ratings on review for downgrade. Moody’s said that the review period will allow the rating agency to assess the South African authorities’ willingness and ability to respond to the rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures; structural economic reforms that ease domestic bottlenecks to growth; and improvements to SOE governance that contain contingent liabilities.
In the meantime, South Africa maintains credit strengths that still support its investment rating. “These include deep domestic financial markets and a well-capitalized banking sector; a well-developed macroeconomic framework; and low foreign currency debt. Adherence to the Constitution and the rule of law continue to be the key pillars of strength of South Africa’s institutions.”
Matthews comments: “Moody’s now has 60 to 90 days to make the move, a period which covers both the ANC elective conference and the February 2018 budget. South Africa is set for a potential game-changing period in coming months. There are reports that Deputy President Cyril Ramaphosa, investors’ favoured candidate, is leading the race to take over as ANC leader from President Jacob Zuma. Most economists believe that a clear win for Ramaphosa would be “hugely market-positive”, while a victory for Zuma’s ex-wife Nkosazana Dlamini-Zuma, the other main contender, could place further pressure on the currency.”
The medium-term budget policy statement budget was a red flag for SA’s credit rating. After the budget, Moody’s expressed concern, noting that SA’s interest payments ratio exceeds the median of its peer ratings group. According to Moody’s, more than a third of all sovereign defaults occur when countries allow fiscal imbalances to persist, resulting in unsustainably high debt burdens. When they are no longer able to service or reduce their debt, downgrades invariably follow.
A glimmer of hope that things may improve
Both Moody’s and S&P have indicated that they will take any positive developments into account.
S&P said that its stable outlook after its downgrade reflects its view that South Africa’s credit metrics will remain broadly unchanged next year. “It also speaks to our view that political instability could abate following the party congress of the governing African National Congress (ANC) in December 2017, helping the government to focus on designing and implementing measures to improve economic growth and stabilize public finances.”
S&P commented further: “We could raise the ratings if economic growth or fiscal outcomes strengthen in a significant and sustained manner compared with our base case. Upside ratings pressure could also rise if risks of a marked deterioration in external funding sources were to subside, in our view, and external imbalances decline. Upward pressure on the ratings could also develop were policy makers to introduce economic reforms to benefit job creation, competitiveness, and economic growth.”
Matthews concludes: “An improvement will only take place when government creates an environment that strengthen business and investor confidence to help the country move out of its low-growth cycle. Clear and consistent policy-making, good governance and a clamp down on corruption will promote private investment.
Uncertainty among local and international investors is likely to push South Africa into another low-growth cycle, with a number of negative consequences. Any further downgrades will also have severe consequences for the South African economy going forward.
We are at a crossroads. South Africa will only through a concerted effort by government and business reach its full potential. To a very large extent, the private sector holds the key, but government holds the door.”
READ HERE in Beeld – Sake
READ HERE in TimesLive
READ HERE in Mail & Guardian
Categories: Economy, News