SA’s sovereign rat­ing, cou­pled with a gloomy eco­nomic out­look, are in­di­ca­tors of a likely in­crease in in­ter­est rates

CityPress - - Business - MOYAGABO MAAKE moyagabo.maake@city­ see graphic).

The ma­jor rat­ings agen­cies are widely ex­pected to af­firm South Africa’s sovereign rat­ing a notch above junk sta­tus with a neg­a­tive out­look as they re­lease their out­look in the next few weeks. US-based Fitch Rat­ings was due to be the first to do so on Fri­day. The poor rat­ings would be due mainly to tepid eco­nomic growth, cou­pled with large bud­get and cur­rent ac­count deficits that have in­creas­ingly held South Africa at the mercy of for­eign in­vestors.

Trea­sury es­ti­mates that the bud­get deficit as a per­cent­age of GDP will come in at 6.1% this fis­cal year. This will fall to 4.2% in 2016/17, then nar­row to 3.9% in 2017/18.

Gov­ern­ment fi­nances the deficit through sell­ing gov­ern­ment bonds – and for­eign in­vestors’ par­tic­i­pa­tion in this mar­ket is at his­tor­i­cally high lev­els.

Ac­cord­ing to Trea­sury’s lat­est debt man­age­ment re­port, by March last year for­eign in­vestors held 37.2% of lo­cal gov­ern­ment bonds, up from just 12.8% in 2008 and higher than the 29% held by lo­cal pen­sion funds.

The cur­rent ac­count deficit – a mea­sure of the coun­try’s trade com­pet­i­tive­ness – which widened to 6% of GDP com­pared with 4% six years ago, has set­tled at 5.1% in the fi­nal quar­ter of last year.

It has pri­mar­ily re­lied on fi­nan­cial and cap­i­tal flows – mainly from for­eign in­vestors re­cently – for fi­nanc­ing.

For­eign in­vestors were lured to emerg­ing mar­kets like South Africa af­ter eco­nomic stim­u­lus packages, known as quan­ti­ta­tive eas­ing – which in­cluded low in­ter­est rates – in­tro­duced by the US and the UK in­jected money into the global fi­nan­cial sys­tem and in­vestors were driven to search for higher yields in riskier mar­kets.

But this is set to change as the Fed­eral Re­serve, which ended its quan­ti­ta­tive eas­ing pro­gramme in Oc­to­ber, pre­pares to raise in­ter­est rates later this year. Min­utes of the Fed­eral Open Mar­ket Com­mit­tee’s April meet­ing, re­leased last month, showed that mem­bers be­lieved the process of rais­ing rates would run smoothly once it started.

A sur­vey of mar­ket par­tic­i­pants in­di­cated that the re­spon­dents saw the Fed’s Septem­ber meet­ing as the date when it would be most likely to raise rates.

On Thurs­day, In­ter­na­tional Mon­e­tary Fund (IMF) head Christine La­garde called on the Fed to de­lay rais­ing rates to the first half of next year as signs of wage or price in­fla­tion were not strong enough to raise them ear­lier.

“The IMF’s call for the Fed to de­lay hik­ing rates into next year has not seem­ingly had much im­pact on mar­ket pric­ing, the bet­ting is still for Septem­ber or more prob­a­bly De­cem­ber,” said Rand Mer­chant Bank’s John Cairns.

This is al­ready show­ing on the mar­kets – trade in South Africa’s bench­mark 10-year bond reg­is­tered a fall in value in the past three months, while com­pa­ra­ble bonds in the US and Ger­many gained (

Fears that Greece would de­fault on a €300 mil­lion (R4.2 bil­lion) debt pay­ment due to the IMF on Fri­day, which were averted in a last-minute Thurs­day deal to bun­dle it with three other pay­ments payable at the end of June, dragged down all three bonds. “This is al­lowed un­der IMF rules, but the risk is that by miss­ing [Fri­day’s] pay­ment, de­pos­i­tor and in­vestor panic spreads,” said Cairns.

The JSE’s All Share In­dex has been more re­silient, more or less track­ing – even over­tak­ing – the MSCI World In­dex of large and mid-sized com­pa­nies in 23 de­vel­oped coun­tries. But it has recorded a cu­mu­la­tive fall since the re­lease of the Fed’s state­ment.

Over­all net in­flows from for­eign in­vestors, which stood at R25 bil­lion in 2013, halved by the time Re­serve Bank gover­nor Le­setja Kganyago an­nounced the mon­e­tary pol­icy com­mit­tee’s de­ci­sion to keep in­ter­est rates un­changed last month.

He said it was not clear how much the Fed’s plans had been priced into the rand and this might push in­fla­tion up­wards.

He also ex­pressed con­cern about above­in­fla­tion wage and salary growth, as well as Eskom’s ap­pli­ca­tion to Nersa to re­open its tar­iff de­ter­mi­na­tion for this year, which will be de­cided at the end of this month.

All th­ese fac­tors were an in­di­ca­tion of bad news for the Re­serve Bank’s in­fla­tion out­look and sug­gested in­ter­est rates may rise.

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