Junk status threat deepens
Strategist sees ratings agencies downgrading SA
SOUTH Africa will probably have its sovereign credit rating cut to junk by two of the big three ratings agencies in coming days – perhaps as soon as yesterday by S&P Global Ratings.
S&P, which was only scheduled to review SA’ s credit rating on June 2, reportedly had an emergency meeting at the weekend following President Jacob Zuma’s firing of Finance Minister Pravin Gordhan and his deputy, Mcebisi Jonas, at midnight last Thursday.
According to a research note from Barclays, a cut to junk for SA would result in forced selling by institutions whose mandates do not permit them to hold “sub-investment grade” bonds of at least $500-million (R6.8-billion) in dollardenominated debt.
“We think it is very likely that all the agencies will downgrade the sovereign credit rating by one notch each,” RMB currency strategist John Cairns warned in a note e-mailed on Friday.
SA has an “edge of junk” rating of BBB- from S&P and Fitch, and a Baa2 from Moody’s, which is equivalent to BBB in S&P’s and Fitch’s nomenclature.
“This means that the foreign currency credit rating from S&P and Fitch will fall to BB+, while it will sit at the edge of investment grade at Moody’s, Baa3. We think all three rating agencies will retain their negative outlooks.
“Moody’s action will occur as per schedule on April 7. Fitch is not bound by a timeline, so it can also act quickly. It is not certain, but S&P might bring forward its review to the coming weeks, ahead of the scheduled June 2 deadline,” Cairns said.
Nomura emerging-markets analyst, Peter Attard Montalto, said in a note on Friday: “We believe ratings agencies will downgrade rapidly, possibly ahead of decision dates, in response to the removal of credible National Treasury leadership for the precise reason that they were market credible. In other words, we see reassessments of institutional quality compounding existing negativity ratings on growth.”
Montalto said he expected S&P to downgrade SA’s external rating one notch to junk and its local rating by two notches to bring it in line at BB+.
He sees Fitch downgrading all ratings by one notch to BB+. Moody’s should also downgrade ratings by a notch which would leave it just in investment grade.
“Agencies may remain on negative watch for the bigger fiscal and growth shock to come. However, we fear that agencies have been too willing to give SA the benefit of the doubt, which SA has failed to live up to. As such, we see a risk that agencies wait to see actual evidence of policy degradation first, though we think examples on the procurement front may come relatively quickly. Ultimately, however, we think the growth-to-fiscal shock will be large enough to push them over the edge to cut sooner or later,” Montalto said.
Fitch on Friday issued a statement warning Zuma’s cabinet reshuffle “could result in Fitch reviewing its ratings on the South African sovereign”.
“We believe fiscal consolidation is likely to become less of a priority and the move to improve transparency and governance of state-owned enterprises (SOEs) will be halted. SOEs’ liabilities, and therefore contingent liabilities to the government, will probably grow more rapidly, particularly if a plan to postpone the commissioning of new nuclear power stations to 2037 is reversed.” The yield on the government’s benchmark 10-year R186 bonds has risen from 8.355% before Zuma fired Gordhan to 8.84%. The yield on the R186 bond spiked at 10.4% on December 11 2015, when Zuma caused chaos by appointing Des van Rooyen as finance minister before bringing Gordhan back into the job to calm markets. —TMG