New downgrades loom with billions set to leave SA

RATINGS agencies Moody’s and Standards & Poor’s are expected to make a decision on whether to downgrade South Africa’s rand-denominated debt on Friday.

If both decide that South Africa’s rand debt must be downgraded, an estimated R70-billion to R100-billion foreign investment will leave the country, which could further weaken the rand, driving up food and fuel prices

Economists warned last week that instability at the Treasury and financial distress at Eskom had increased the likelihood of a downgrade.

Economist Dawie Roodt said the economy was in “very, very, very deep trouble”.

Only one of the three ratings agencies, Fitch, has decided that South Africa’s rand-denominated debt is below investment grade or at junk status.

About 90% of our debt is in rands. But if the next two ratings agencies decide our randdenominated debt is equal to junk status, many foreign funds will not be legally allowed to invest in South Africa and will pull out their funds.

Stanlib chief economist Kevin Lings estimates there is between R70-billion and R100-billion in debt foreigners would be forced to sell.

Lings said the rating agencies might give South Africa the benefit of the doubt this week and wait until after the ANC elective conference next month to see if the country improved under the newly elected ANC leader.

Lings said that once a country’s main debt was rated at junk status it took an average time of eight years to go back to investment grade.

Junk status by all three ratings agencies would make it more expensive to borrow money, and increase the government’s interest payments.

Economist Daniel Silke said that if the government paid more interest on borrowed money, this left less money for other spending, like education.

Lings said the fastest-growing budget item was the government’s interest it paid on debt.

He said rating agencies looked at whether economic growth was stagnated, whether the country was meeting its debt targets and how much debt it had, including by SOEs.

Instability at the Treasury with Michael Sachs’s departure, a bleak financial situation at Eskom, and the fact that Finance Minister Malusi Gigaba admitted in the medium-term budget speech that South Africa had missed its debt targets all added to the likelihood of a downgrade, economists said.