The outcome of the ANCs long-awaited KwaZulu-Natal conference was a win for the Thuma Mina crowd. (Delwyn Verasamy/M&G)
CAPE TOWN, June 3 (ANA) – As many South Africans waited nervously on Friday to hear whether the country had received the dreaded downgrade to ‘junk’ status, it seemed worth noting that countries that had lost and then regained their investment-grade status in the past had taken an average of seven years to do so.
Christie Viljoen, an economist at KPMG South Africa, pointed this out as conversations about the demerits – and even some possible merits – of a ratings downgrade dominated the airwaves. The international ratings agency Standard &a Poor’s (S&P) was expected to release its impatiently awaited review of the South African sovereign’s credit rating on Friday evening.
In December 2015, S&P gave South Africa the lowest possible investment grade rating with a negative outlook. The negative stance was largely associated with fears that economic growth would undershoot projections for 2016/17.
Viljoen noted on Friday that Moody’s Investors Service, another of the big three global ratings agencies, had said recently that it saw the country’s economic growth gradually strengthening after reaching a trough during 2016. He said S&P might have the same perspective on this issue when it decided whether South Africa should retain its investment-grade rating, but added that S&P had noted other points of concern too, including risks posed to the public sector balance sheet by struggling state-owned enterprises, a potential reduction in fiscal flexibility, and an increase in external imbalances.
A rating agency’s perspective on the creditworthiness of a sovereign is an opinion on the likelihood of the entity defaulting on payment obligations. It takes into account both the ability and willingness to pay.
While methodologies differ between rating agencies, the core factors evaluated by all of them include institutional strength, economic policy, the health of the economy, monetary policy, fiscal and debt dynamics, domestic political factors and susceptibility to international influences.
Analysts believe that the immediate fallout from a downgrade would be a weaker exchange rate, a decline in local equities and a rise in government bond yields.
According to a recent South African Reserve Bank study of 70 countries, a downgrade to non-investment grade is likely to increase a sovereign’s short-term foreign currency borrowing costs by 80 basis points.
Also based on the experience of other countries and based on ratings assigned by S&P, Moody’s and Fitch Ratings, Viljoen says, 15 countries which had seen their investment grade rating revoked over the past three decades were able to regain this status.
He said the causes for the downgrades were grouped into the four broad categories of economic deterioration; unsustainable macroeconomic imbalances; a domestic currency, financial or banking crisis; and a currency, financial or banking crisis resulting directly from neighbouring or regional influences.
Different experiences show that it takes on average seven years to again graduate to the investment-grade club. Such countries as Croatia, Iceland, Ireland and the Korean Republic were able to do so within three years. At the other end of the spectrum there were instances where it took countries, including Colombia, India, Indonesia, Turkey and Uruguay, more than a decade to do so.
Viljoen concluded that if South Africa lost its investment grade rating anytime soon, it might take many years to recoup lost ground. Also returning to an investment grade position was no guarantee of maintaining this status. For example, Moody’s downgraded India to non-investment grade in 1991, back up to investment grade in 1994, down again in 1998 and up again in 2004.
– African News Agency (ANA)
Disclaimer: This story is pulled directly from the African News Agency wire, and has not been edited by Mail & Guardian staff. The M&G does not accept responsibility for errors in any statement, quote or extract that may be contained therein.