SA risks losing R150bn with more downgrades
• Foreign investors could be forced into sell-offs in accordance with investment-rating rules
Markets are waiting to see if the decision by Fitch to junk SA’s foreign and local currency ratings on Friday will be followed by further downgrades by Moody’s and S&P, with estimates of at least $8bn to $13bn (R100bn to R150bn) of forced selling by foreign investors if the other agencies downgrade SA’s local currency rating.
Fitch said on Friday that recent political events including the cabinet reshuffle, would weaken standards of governance and public finances and would result in a change in the direction of economic policy.
It expressed concern that the reshuffle would undermine — if not reverse — progress in stateowned-enterprise governance and would probably move the nuclear programme forward relatively quickly, implying that the Treasury would have to substantially increase guarantees to Eskom.
The CEO Initiative said on Friday the wellbeing of South Africans had been dealt a blow and urged the government to maintain continuity and apply strict discipline in managing the country’s finances.
However, the Association of Black Securities and Investment Professionals said the ratings agencies should have given SA time to see if it would stick to its fiscal consolidation path before downgrading so abruptly.
“We are devastated by the downgrade to junk status,” said association president Sibongiseni Mbatha. “But for SA to be downgraded in this way was a bit harsh.”
Fitch’s decision to downgrade came after S&P took SA’s foreign currency rating down to subinvestment grade last week, retaining an investment-grade rating for local currency debt but putting both ratings on negative outlook. Moody’s has SA’s ratings at two above junk, but last week put the ratings on watch for a downgrade.
The foreign currency rating applies to hard currency debt, which accounts for about 10% of government debt, while the local rating applies to debt raised in rand on the domestic market.
However, foreign investors hold more than a third of the government’s rand debt and many would have to sell in the event of a subinvestment grade with more than one agency.
In particular, “passive investors” in funds that track bond indices would be forced to sell within a month after a downgrade if the funds’ rules require investment-grade ratings.
The key World Government Bond index requires investment-grade local currency ratings from S&P and Moody’s. Barclays Capital group treasurer Deon Raju said it was conservatively estimated that $5bn of capital was at risk if one of those agencies downgraded, with a further $2.5bn at risk in the Barclays Global Aggregate index and $800m already set to flow out due to a sell-off by investors tracking the JP Morgan index, which requires investment grade from all three agencies. In total, Barclays estimates $8bn is at risk of forced selling.
However, Raju said SA offered attractive real yields relative to other emerging markets, so any sell-off by foreign tracker funds might be offset by inflows from investors.
Nomura economist Peter Attard Montalto said there may have been ratings-sensitive passive inflows to SA that would have to flow out again later.