SA expected to dodge ‘junk’ status

OLD MUTUAL: EXPECTS MOODY’S REPRIEVE AT NEXT CALL

Old Mutual does not expect Moody’s to downgrade SA’s credit rating to ‘junk’ when it submits its 90-day review.

Old Mutual sees the junk clouds clearing, but a lot of work lies ahead to avoid capital flight.

Old Mutual does not expect Moody’s to downgrade SA’s credit rating to “junk” when it submits its 90-day review, but a lot of hard work lies ahead to avoid a full meltdown.

So says Old Mutual Investment Group chief economist Rian le Roux, who warns a downgrade to junk remains – “in a worst-case scenario, even a full-scale ratings meltdown, characterised by multiple downgrades by all agencies”.

Walk the walk

Simply trying to avoid another downgrade in the coming months won’t be enough, he warns.

“SA must actively focus on correcting the issues that are undermining our investment grade rating, with the most immediate focus being to have the negative outlook changed to stable as soon as possible,” he said yesterday.

“We fully expect Moody’s to downgrade both the foreign and local currency rating by one notch, so still leaving both in investment grade,” Le Roux says.

“As we already know, if SA were to lose investment-grade status on local currency government bonds from both Moody’s and S&P, we could be facing significant foreign investment outflows through forced selling of tracker global bond funds,” he explains.

“It is therefore indeed a relief that S&P decided to leave the crucial local currency bond rating unchanged at the lowest investment grade last week.

“Given that we expect Moody’s to have the same rating as S&P after their review, it provides SA with another brief reprieve to get its economic house in order. However, the reprieve will be short as both agencies will revisit SA’s ratings within less than six months.”

Significant uncertainty remains about the fate of government bonds should a junk downgrade take effect. If big funds are then forced to sell, that could create a secondary market with even greater demand for South Africa’s prized, high bond yields.

“We know that foreigners own about R600 billion of rand-denominated government bonds but it is impossible to tell with certainty which part of this will be under forced selling pressure.”

One thing is certain: SA can’t afford to become a net exporter of capital, which could badly dent future economic performance.

Capital flight will weaken the rand and raise inflation and government and private borrowing costs, he says.

“But the shock dealt to business and investor confidence will be even greater and longer lasting, undermining the growth and job creation potential of the economy,” he said.

Rebuilding confidence

“The most important focus of government in the short term has to be on rebuilding business and investor confidence, a prerequisite for which will be greater policy certainty and predictability,” he says.

“Considerable uncertainties currently exist as to the practical policy implications of government’s radical economic transformation agenda. Clarity is required urgently in order to stabilise confidence,” Le Roux added.