What awaits if Moody’s cuts rating to junk
DONE DEAL: SOME ANALYSTS PREDICT AN SA DOWNGRADE IS ALREADY PRICED IN
Outlook change will probably give SA as long as 18 months to improve its finances, Investec chief economist says.
Most analysts following South Africa expect it to lose its final investment-grade rating. But they disagree over when that might happen and what the consequences would be.
The gloomiest reckon it would trigger more than $10 billion of outflows and cause the rand to weaken to its lowest level in almost four years. Others say investors have already priced in a downgrade and South African assets may even rise in the aftermath, especially if sentiment toward emerging markets stays strong. Here’s what analysts say the impact would be:
Bank of America:
The US lender expects a rating downgrade soon after February’s budget review, doubting President Cyril Ramaphosa’s administration will manage to address concerns about a widening fiscal gap or debt-laden state power company Eskom by then. But analysts David Hauner and Jure Jeric say markets have priced this in and outflows may only reach $1.5 billion, especially if China and the US continue to buoy emerging markets by reducing tensions over trade.
Bank of New York Mellon:
Daniel Tenengauzer, head of markets strategy, is in the bearish camp and forecasts between $8 billion and $12 billion of outflows if South Africa exits the World Government Bond Index (WGBI). Its status as the highest-yielding country in the index may not help much to curb the selling, he said. Rand bond rates average 9.2%, about 360 basis points more than those for the second-highest yielding currency, the Mexican peso.
Citigroup:
A downgrade in March is possible if SA fails to come up with a “credible debt-stabilisation strategy” which will involve tough negotiations between the government and unions about reining in spending, according to Gina Schoeman, an economist at the Wall Street bank. Moody’s “tolerance appears low”, she said in a November 4 note to clients, adding a WGBI exclusion would probably lead to between $6 billion and $7 billion of capital exiting the country.
Intellidex:
SA’s chances of avoiding a downgrade after the February budget are 50:50, said Peter Attard Montalto, the London-based head of capital-markets research. A cut has been priced in to “a moderate degree” and could result in $5 billion of outflows, he said.
Investec:
Annabel Bishop, the bank’s chief economist, said a negative outlook, rather than a ratings watch, means Moody’s will probably give SA 18 months to improve its finances. The government’s 10-year local-currency yields may rise to about 10% if there’s a downgrade, but probably won’t climb as much as those in Brazil and Turkey did when they were cut to junk.
Rand Merchant Bank:
Moody’s “really marked SA down because of our politics”, Kim Silberman, a fixed-income analyst at the Johannesburg-based investment bank, said in a video for clients on November 4. She thinks a downgrade by March is now “quite possible” and the rand would probably drop to 16 per dollar, 7.6% weaker than currently. – Bloomberg