SA awaits $7bn ratings double jeopardy

SA will confront the threat of a $7 billion debt selloff this week as it awaits two concurrent judgments on its credit status.

Opinion among economists is divided as to how stark a danger that is. Fifty-six percent of respondents in a Bloomberg survey said S&P Global Ratings will reduce its assessment on rand-denominated debt to the highest noninvestment grade tomorrow.

Moody’s Investors Service, which is scheduled to make a decision, will likely leave it unchanged, according to three-quarters of those asked.

Should both companies cut, rand debt would fall out of gauges including Citigroup’s World Government Bond Index, sparking outflows of R80 billion to R100 billion, Citigroup economist Gina Schoeman said. This would raise borrowing costs for SA, that is selling more debt to plug a widening budget gap.

“Given the fraught political context in which South Africa finds itself, alongside the negative repercussions of downgrades in triggering ejection from key bond indices, we believe the rating agencies will not rush to cement decisions to downgrade this month,” said Phoenix Kalen at Societe Generale SA in London.

The sustainability of the nation’s debt will be at risk unless government presents a credible fiscal consolidation plan in 2018, Moody’s said after the mid-term budget last month. While the outcome of the ANC’s elective conference next month will be of interest to ratings companies, it’s the February budget that they’ll be watching for clues on the country’s debt direction, said Annabel Bishop at Investec Bank. “The budget will provide the fiscal detail that was lacking in the 2017 medium-term budget policy statement, which is needed in assessing South Africa’s creditworthiness,” she said. “The likelihood has increased for South Africa to lose its remaining investment-grade ratings.”

Investors are pricing in a downgrade of SA’s debt, with yields on dollar securities surpassing those of lower-rated countries such as Brazil and Russia. SA’s US currency bonds due in September 2027 yield 5.08%.

Still, investors’ search for higher yields could help counter some of the expected outflows, Citigroup’s Schoeman said. – Bloomberg