S&P cuts South African debt to junk
S&P Global Ratings cut South Africa’s local currency debt score to junk at the weekend, while Moody’s Investors Service also threatened to slash its ranking to the same level, raising the risk of a sell-off from global indexes.
S&P lowered the country’s local currency rating one step to BB plus, one level below investment grade, and placed it on a stable outlook. Its assessment on South Africa’s foreign currency debt, which it already considered speculative, was taken down a notch to BB. Moody’s opted to keep both readings on Baa3, its lowest investment grade, but put them on review for possible downgrade.
The reduction by S&P “reflects our opinion of further deterioration of South Africa’s economic outlook and its public finances”, the company said. “Economic decisions in recent years have largely focused on the distribution – rather than the growth of – national income. As a consequence, South Africa’s economy has stagnated and external competitiveness has eroded.”
Should Moody’s also downgrade the local currency rating, rand debt would fall out of gauges including Citigroup’s World Government Bond Index, and this could spark outflows of as much as 100 billion rand (Dh25.7bn), Citigroup economist Gina Schoeman said ahead of the rating company announcements. A sell-off of rand bonds – which comprise about 90 per cent of South Africa’s outstanding liabilities – would raise borrowing costs for the nation as it sells more debt to plug a widening budget gap.
“This credit action will result in increased volatility going forward as certain global passive investors need to rebalance their exposure to the sovereign credit,” Absa Investment Management said in a research note yesterday. “Since it is likely to be the precursor to exclusion from the WGBI, investor positioning could pre-hedge by selling SA bonds and offset any positive market reaction.”
The government is considering measures that will combine tax increases and spending cuts to save 40bn rand in the 2019 fiscal year, the National Treasury said.
“Government is working urgently and diligently on practical steps to provide the necessary policy certainty, environment conducive to investment, and predictability that the country so desperately needs,” it said. The Treasury will provide more information in the budget that’s due for release in February.
The rand fell as much as 2 per cent to 14.1585 per dollar Friday, and has lost 7.5 per cent of its value since the middle of the year.
Fitch Ratings on Thursday affirmed South Africa’s foreign and local debt scores at its highest non-investment grade with a stable outlook.
Conflict in the ruling party in the run-up to its leadership election next month has hamstrung efforts to bolster Africa’s most-industrialised economy, which had its second recession in less than a decade earlier this year. Business confidence is near the lowest level in more than three decades amid allegations of corruption against state company managers and politicians including the president Jacob Zuma.
“Many economic and political problems South Africans experience are rooted in corruption, state capture and political patronage resulting in trust deficit,” said Bonang Mohale, the chief executive of Business Leadership South Africa, which represents about 80 of the country’s biggest companies. Until state institutions are independent, the government abandons nuclear-energy plans and it provides clear mining-industry rules,” the trust deficit will persist, he said.
Many economic and political problems South Africans experience are rooted in corruption and political patronage BONANG MOHALE Business Leadership South Africa CEO