SA on Friday dodged a further ratings downgrade from S&P Global Ratings (S&P), but remains in the danger zone: Moody’s is expected to cut SA’s ratings to just one notch above junk in the next couple of weeks; and S&P could look to junk the local currency rating in December.
S&P, which in April junked SA’s foreign-currency rating after the cabinet reshuffle, on Friday night affirmed its ratings, but kept SA on negative outlook, warning that political risks would remain elevated in 2017.
Moody’s will be watching closely to see if economic growth or the October budget disappoint or the finances of SA’s state-owned enterprises (SOEs) deteriorate. Political risk could “distract from economic growth enhancing priorities, slow the pace of fiscal consolidation, and impact upon investor and consumer confidence, more than we currently project”, the agency said.
S&P is the only one of the three ratings agencies whose local currency rating, on SA’s rand-denominated debt, is a notch higher than its foreign-currency rating, which covers debt in hard currency. It has long signalled its intention to close the gap and it is expected that its next move would be to cut the local-currency rating to sub-investment grade to align it with the foreign currency rating.
Meanwhile, markets are waiting for a decision from Moody’s, which put SA on review for a downgrade on April 3 and could report back as early as this Friday. Most in the market expect a one-notch, rather than a two-notch, downgrade, which would still leave SA just on the edge of investment grade.
The big question is whether Moody’s will put the outlook on stable or negative, with negative indicating further downgrades could be on the cards, which would take SA’s local and foreign currency ratings into junk territory on the Moody’s scale.
Investment Solutions economist Lesiba Mothata said he would be surprised if Moody’s put a stable outlook on SA’s rating. Citi economist Gina Schoeman said it was 50:50 whether Moody’s would go stable or negative, but her money was on negative, which would enable the agency to downgrade quickly “if things unravel”.
October’s medium-term budget would be closely watched by all three ratings agencies, so they would probably want to wait until December to see if further negative action was justified — or they might wait until after the ANC’s elective conference in December.
A downgrade of SA’s local currency to sub-investment grade by both S&P and Moody’s would see SA excluded from the key Citi World Government Bond Index. Schoeman and her colleague Adriaan du Toit estimated in a report published last week that this could trigger R85bn to R130bn in government bond sales by foreign investors.
All three agencies have expressed concern about the risk posed to the public purse by ailing SOEs that depend on government guarantees to raise funding.
Mothata said an “ominous” sign in the S&P report was its prediction that SOEs utilisation of guarantees would increase to 10% of GDP by 2020.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.