Fitch likely to give South Africa ‘junk’ rating

JOHANNESBURG (Reuters) – Ratings agency Fitch is likely to follow rival S&P and cut South Africa’s sovereign credit rating to below investment grade, analysts said, an outcome that would underscore worries about political uncertainty and prompt a further sell-off in assets.

S&P Global Ratings cut South Africa’s foreign-currency debt to speculative grade, or “junk” status, in an unscheduled review on Monday, citing political tensions that led to the sacking of respected finance minister Pravin Gordhan.

“Fitch is likely to be the next agency to downgrade in the next seven to 10 days, to align with S&P at BB+, which means that two out of the three major ratings agencies will have South Africa’s foreign-currency rating at ‘junk,’” BNP Paribas Securities South Africa economist Jeffrey Schultz said on Thursday.

Downgrades to junk from at least two agencies would see South Africa drop out of some widely used global bond indexes and force international funds that track them, or that are prohibited from holding sub-investment-grade securities, to sell.

Fitch, which rates South Africa BBB-, its lowest investment-grade rating, has said President Jacob Zuma’s cabinet shake-up heightened political risks and signaled policy change, putting its rating at risk. The agency has not said when it will publish its review, but analysts say it could be soon.

“Fitch tends to be aligned with S&P, and so could also provide a sub-investment country credit rating for South Africa this year,” Investec chief economist Annabel Bishop said in a note.

Africa’s most industrialized economy depends on foreign money to cover its large budget and current account deficits. But it is struggling to attract investment, with sentiment dimmed by political uncertainty and a weak growth outlook.

The rand currency has fallen more than 12% since March 27, when Zuma ordered Gordhan to return from an investor road show abroad. Government bonds have also weakened .

Conservative investment funds usually require countries to have at least two investment-grade ratings for them to invest. For now, Fitch and Moody’s – whose Baa2 rating is two notches above “junk” – ensure South Africa meets that criteria.

Moody’s has said it is reviewing the rating, a process that could take 30 to 90 days.

Schultz at BNP Paribas expects Moody’s to downgrade South Africa to Baa3 from Baa2, putting it one notch above junk.

KPMG senior economist Christie Viljoen also said Fitch was likely to downgrade South Africa by early June at the latest.

“I initially thought December. But now June is looking realistic as well,” she said, concurring that Moody’s was unlikely to make a two-notch downgrade to junk.

If South Africa loses two of its prized investment-grade ratings for foreign and local currency debt, the country could lose more than $10 billion in investment funds.

All three agencies still rate South Africa investment-grade for local-currency borrowing, which makes up about 90% of the country’s total 2.2-trillion-rand ($160b.) of debt.

A downgrade to junk by Moody’s was not ruled out completely, with Standard Chartered Bank’s chief Africa economist Razia Khan saying on Monday the recent political tensions raised the risk of a potential two-notch move from the agency.