Ratings downgrade would prompt cash flight

THE decisions by ratings agencies S&P Global Ratings and Moody’s Investors Service on South Africa’s sovereign ratings on Friday will be crucial.

If either cuts its local currency ratings, the government’s R1.8 trillion stock of rand-denominated debt will no longer be allowed to be kept by asset managers, whose mandates specify that they may hold only investment grade bonds rated by at least two out of the three major ratings agencies.

Fitch Ratings, the other major agency, has already cut both South Africa’s local currency and foreign currency government debt into the non-investment grade category. National Treasury increase its fiscal deficit forecast for this fiscal year to 4.3% of gross domestic product (GDP) from 3.1% forecast in the February Budget. Finance Minister Malusi Gigaba said the increase in the fiscal deficit was due to a R50.8bn revenue shortfall, as well as costly bailouts to struggling state-owned enterprises such as SAA.

Apart from the ratings agencies’ decisions, we have the October steel production data on either Monday or Tuesday, the September leading indicator on Tuesday, the October consumer inflation data on Wednesday, followed by the decision of the SA Reserve Bank Monetary Policy Committee (MPC) on Thursday.

September tourism data and the October BankservAfrica Disposable Salary Index are also scheduled for release on Thursday.

The consensus forecast for consumer inflation is an easing to 4.9% year-on-year (y/y) from 5.1% y/y in September due to slowing food and fuel inflation.

Despite this easing in inflation, the consensus expectation of economists is that the MPC will keep the repo rate steady, which is what it did at the last MPC meeting in September.

The composite leading business cycle indicator fell by 0.3% m/m in August.

This followed a jump in July after a series of monthly declines from February. The leading indicator is supposed to forecast economic activity six months ahead.

Although there were only decreases in three of the 10 component time series that were available for August, this narrowly outweighed increases in the other seven components.

The expectation is that the leading indicator will rebound in September, given the recent spate of August and September data such as manufacturing production, mining production and retail sales that have exceeded the consensus forecast.

Xenophobia and the strong rand are slowing tourism growth, with only a 2.2% y/y increase in August after a 4.8% y/y gain in July.

Steel production grew by 9.0% y/y in September to 556 000 tons. This brought the increase for the third quarter to 8.2% y/y compared with a 4.1% y/y decline in the first half of the year.