Brazil’s downgrading should be a warning for South Africa

THE CUTTING of Brazil’s credit rating to junk by Standard & Poor’s (S&P) should set the warning lights flashing that South Africa might be next in line, economists said yesterday.

Gina Schoeman, an emerging markets (EM) economist at Citi, said Brazil’s downgrading certainly heightened the same fate for South Africa.

She said this was because EM growth was at greater risk now that China was expected to slow down more significantly than before. South Africa’s gross domestic product outlook was proving significantly more poorly than the consensus had expected, which places the national budget revenue under strain. Schoeman said if the Treasury was forced to postpone fiscal consolidation because of this, S&P might well run out of patience.

“It is important to realise that S&P would first need to revise the outlook to negative and to then downgrade six months later. This buys South Africa’s authorities some time in guarding against this risk.”

Financial markets

are betting that South Africa, Russia, Turkey and Colombia could all be next in line for “junk” debt status after S&P stripped Brazil of its investment grade.

S&P’s step also raised the spectre that South Africa and Russia, both members of Brics, particularly South Africa, could be under threat from downgrades.

Russia was already reduced to junk by S&P and Moody’s Investors Service this year.

Commerzbank said Brazil and South Africa were vulnerable to a slowdown in China because the world’s second-largest economy was a major export market for both countries.

“Brics ratings action is probably the biggest risk for emerging markets as a whole rather,” Simon Quijano-Evans, the chief emerging-market strategist at Commerzbank, said.

Brazil’s downgrade had long been expected, following recent scandals and its slump towards recession, but it has sharpened the focus on who could be next.

Slumping commodity prices and the prospect of rising global interest rates are adding to some liberal helpings of ugly national politics and laying ernment remained committed to its fiscal consolidation path, which would ultimately hold the key to whether or not the country preserved its rating.

“Our view is that South Africa’s investment-grade rating is not under immediate threat, but the longer-term preservation of this status will require commitment to the fiscal consolidation promise.”

Russell Lamberti, a director and strategist at ETM Investment Services, said Brazil’s downgrade showed that bad economic policies had consequences, and that poor policy tended to get exposed during global economic downturns, which South Africa was experiencing. He said South Africa’s fiscal policy was reckless, albeit less so than Brazil’s.

“I think the warning lights for South Africa were already flashing before Brazil’s downgrade. It seems quite likely that South Africa will be downgraded to junk by at least one ratings agency within the coming 12 months.” – Additional reporting by Bloomberg and Reuters page 24 Sanisha Packirisamy, an economist at MMI Holdings, said: “As a result of rising costs and weak domestic demand, we see little scope for a significant improvement in employment gains and the outlook for infrastructure spend in the manufacturing sector. The outlook for manufacturing remains bleak.”

Annual mining output growth increased marginally to 5.6 percent in July from 5.4 percent in June (previously reported as 4 percent), pushed mainly by the production of platinum group metals which increased by 71.8 percent year on year. The market expectation was 2.8 percent.

On a seasonally adjusted basis, mining production increased by 1.1 percent month - on-month in July, but was down by 4.3 percent quarter on quarter for the three months to July.

Gold production declined by 7.4 percent compared with a year ago.

First National Bank industry economist Jason Muscat said any further strike activity in the mining sector could be enough to push the economy into a technical recession (two consecutive quarters of negative growth), but he remained concerned about waning demand from China and falling commodity prices.