There’s something worse than junk status — and that’s deep junk

Brazil, Bolivia, Greece … emerging markets are typically junk

Does it matter if SA is just junk, or even more junky? Ratings agency Moody’s recent decision to put SA on negative outlook caused consternation. But S&P Global’s decision to do the same caused hardly a murmur — because S&P already has SA at sub-investment grade “junk” status, as does rival Fitch, whereas Moody’s has kept us at investment grade. In S&P’s case, SA’s foreign currency rating — the rating on our dollar-, euro- or yendenominated debt — is already two notches into “junk”, or speculative grade. A further downgrade would take us down to BB- (double B minus). It would put us on par with countries such as Brazil, Bolivia and Bangladesh, as well as Greece and Guatemala.

In a way, that confirms that SA is just another emerging market on the S&P scale — not a weak one (Zambia is rated CCC), but not one of the strong ones such as India or Mexico, either. At Moody’s, too, emerging markets are typically junk — a recent report showed just 32 of the 106 emerging-market sovereigns it now rates are investment grade.

SA is still clinging to its place in that small elite. Its last investment grade rating matters because it attracts the better end of international institutional investors — longerterm fund managers who target investment-grade bonds, rather than more volatile folk who zip in and out of risky, speculative-grade assets.

A Moody’s downgrade would trigger capital outflows because international fund managers who can own only investment-grade bonds would be forced to sell — and it would get SA booted out of the key world government bond index. But it’s been on the cards for so long that some of the money has already flowed and the impact has already been priced into rand and bonds. The Reserve Bank estimates an outflow of $7bn-$9bn (R103bn-R132bn). And whether and how the rand gets hit will depend on the global market environment at the time.

But that’s the short term. In the longer term, a downgrade would shift the mix of investors in South African bonds, making the market more speculative and volatile. Crucially, it would raise the cost of borrowing for the government and other borrowers in the economy. And the further down the junk scale, the worse it would be.

We’ve tended to be fixated on the prospect of falling off the investment-grade cliff, as it were, as if having fallen we can stop trying. But there are many more notches to fall. The further we fall, the harder it will be to get back, and the greater risk that the government gets into a vicious spiral of downgrades causing higher debt costs, which drive its debt burden higher and, in turn, trigger further downgrades. Which is why the prospect of being further junked by S&P or Fitch should worry us.

It should worry us especially if politicians see falling off the cliff at Moody’s as a sign that ratings no longer matter and that there’s no longer any urgency to reform SA’s economy or rein in its rapidly ballooning public debt. That the rand and bonds bounced back from previous downgrades tends to feed into that narrative, though one could ask where they would have been without the downgrades.

There is a big difference between being near the top of the sub-investment grade scale and being deep into junk territory. As Citi’s Gina Schoeman puts it: “If you’ve gone one notch below, investors still think you could be a comeback story — it keeps investors interested and government on its toes.”

But in the end the ratings agencies are simply telling us what we should know anyway — that unless SA can lift its economic growth rate and fix its public finances, it risks not being able to pay back its debts in 10 or 20 years’ time. The latest round of ratings reviews signals that they are losing faith in SA’s ability to navigate its fractured politics and implement a credible turnaround plan. They, and we, will be looking to the budget and the president’s February 2020 state of the nation to counter this.