/ 13 June 2014

SA credit rating downgrade looms

While the rand has weakened 3.3% against the dollar in the past month
While the rand has weakened 3.3% against the dollar in the past month

South Africa is facing its second credit-rating downgrade from Standard & Poor’s (S&P) in two years, if credit-default swaps are anything to go by.

The cost of insuring South Africa’s dollar debt against default within five years suggest the nation’s rating with S&P should be one level lower than its current BBB, on par with the Philippines and Colombia, according to Rand Merchant Bank. Bloomberg’s “chart of the day” shows that South Africa’s credit default swap spread of 177 puts it in a league with countries rated BBB-, including Brazil and Russia, and almost 100 points above the Philippines.

“The odds of a downgrade are better than even,” Carmen Nel, a fixed-income analyst at RMB in Cape Town, said in a June 9 report. “The recent run of bad local data has resulted in ratings fears resurfacing.”

South Africa’s economy contracted in the quarter ended March for the first time since the 2009 recession as a 20-week platinum strike caused mining output to plunge by the most in almost half a century. S&P, which cited weak growth, labour unrest and rising government debt among reasons for maintaining its negative outlook on the nation in December, is scheduled to announce results of its sovereign review later on Friday.

Deteriorating growth prospects
Fitch Ratings lowered the outlook on its BBB grading from stable to negative on Friday morning, citing South Africa’s deteriorating growth prospects.

South Africa’s National Treasury issued an acknowledgement of the downgrade shortly after it was published, saying that it “noted” Fitch’s decision.

“Government is alive to the growth challenges South Africa faces,” said the Treasury in a statement. “It has therefore, prioritised the accelerated implementation of the National Development Plan, with reforms that are aimed at unlocking South Africa’s growth potential. 

“Government will redouble its efforts to improve the regulatory environment, reduce the skills shortage and accelerate its infrastructure investment programme so as to reduce the bottlenecks constraining growth.”

While the rand has weakened 3.3% against the dollar in the past month, partly due to investor speculation of a downgrade, rating actions don’t always trigger the market response that they signal. Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on more than 300 upgrades, downgrades and outlook changes since 1974 and through December 2012. – Bloomberg, additional reporting by Thalia Holmes