Fitch adds SA’s local currency to junk status

FITCH has become the second major rating agency to downgrade South Africa’s rating to junk status.

Fitch dropped both the foreign currency and local currency ratings by one notch yesterday afternoon.

It cited concerns that recent political events‚ including a major Cabinet reshuffle‚ would weaken standards of governance and public finances and was likely to result in a change of economic policy direction.

The downgrade follows S & P Global’s ratings downgrade of South Africa’s foreign currency rating on Monday night.

It makes Fitch the first rating agency to cut the rating on rand-denominated debt to junk status‚ raising the prospect of a bond sell-off by investors whose mandates restrict them to hold only investment grade assets.

S & P’s rating on South Africa’s local currency randdenominated bonds is one notch above its foreign currency rating‚ so the local currency rating is still investment grade on the S & P scale‚ and on that of Moody’s.

However‚ Moody’s on Monday night put the country’s local and foreign currency ratings on review for a downgrade‚ and is expected to announce its decision within 30 to 90 days.

About 90% of government’s borrowing is in rand‚ so it is less vulnerable to a foreign currency downgrade – but foreign investors hold about 35% of the government’s rand-denominated bonds‚ so the Fitch downgrade could also cause some outflows of capital as foreign investors sell.

The rand weakened yest afternoon after the news to an intraday worst level of R13.84 to the dollar after hovering around the R13.77 level for the better part of the day

Banking Association of South Africa MD Cas Coovadia said the Fitch downgrade of both foreign and local currencies of South Africa was “devastating”.

“That Fitch has directly attributed its downgrade to the actions of the president demonstrates in no uncertain terms the broad assertion that the Cabinet reshuffle‚ although the prerogative of the president‚ was not in the national interest.

“A presidential prerogative cannot be exercised in a reckless manner‚ with insufficient regard for the consequences of such prerog Coovadia said.

“This additional downgrade is of greater concern as it includes a downgrade of the rand.

“This will have an immediate and severe impact on the currency‚ will seriously impact on our ability to attract foreign investment and will likely trigger a marked steep rise in prices of goods and services across the board.” — TMG