SA looks set for 'stay of execution' on downgrade

The Johannesburg Stock Exchange. (Paul Botes, M&G)

The Johannesburg Stock Exchange. (Paul Botes, M&G)

As many South Africans waited nervously on Friday to hear whether the country had received the dreaded downgrade to ‘junk’ status, consensus grew that the can would be kicked further down the road, most likely to December.

Peter Worthington, principal and senior economist at Barclays Africa, said on Friday afternoon: “This would be a momentous decision and we think that S&P’s will want to be more confident that they are not making a mistake.”

Read more: A downgrade to junk status will hurt everyone

Worthington added, however, that Barclays thought a ratings downgrade in December was more likely than not.

“That will depend on how quickly growth recovers, if fiscal discipline can be maintained and how the political tensions in the country evolve,” he said.

Read more: Junk-status rating for SA not a big deal, say risk analysts

Other commentators focused on the fact that a downgrade to sub-investment grade would not be the end of the world for South Africa.

At least one commentator pointed out that many countries, including South Africa, had been downgraded in the past and had managed to dig themselves out of that hole. Others suggested that a downgrade was not entirely a bad thing although it was difficult to get anyone to expand convincingly on this idea.

Christie Viljoen, an economist at KPMG South Africa, said that countries that had managed to claw themselves back up above junk status after being downgraded in the last three decades had taken an average of seven years to do so.

Another point worth noting is that many South Africans seemed to have already lost interest in the subject of sovereign ratings long before Friday. Conversations around the water cooler were until recently frequently alive with fear and indignation at the thought of a ratings downgrade and what that might mean for skiing holidays and so on.

Sources close to water coolers in Cape Town, Johannesburg and Howick, in KwaZulu-Natal, confirmed on Friday that office workers were now more likely to be talking about the difference between coffee beans grown in Africa and in South America.
(Consensus being that Brazil and Columbia, delicious as they are, don’t have anything on Ethiopia and Rwanda, but that is a story for another day).

One idea doing the rounds on Friday morning was that recently downgraded Brazil seemed to be enjoying a slight post-downgrade bounce in the value of its currency. Closer inspection, however, showed that the upward movement was in line with a trend in emerging market currencies. Correlation and causation are easy to confuse when it comes to working out what is driving currencies up or down.

Anyway, presidential impeachment processes and footballing prowess aside, comparisons between Brazil and South Africa are not really that useful.

On Friday afternoon, South Africa was still rated investment grade by the three big global ratings agencies; Brazil had already been downgraded by all three, and not just to the level below investment grade.

Analysts have warned 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.

Read more: Junk status or not, SA faces tough economic times and decisions

Many of the very big investors, US pension funds for example, are mandated to hold investments only in entities that are rated investment grade. That said, a downgrade to one grade below investment from just one of the three agencies would not likely set off a sudden, large exodus of funds.

The consensus in news reports on Friday afternoon was that South Africa was expected to dodge the bullet this time and hold on to its investment grade rating until at least December. And, in the event that S&P’s did decide to go ahead and downgrade the country, the most common response was that the effect “won’t be massive”.

There is always an element of sentiment to market reaction and a downgrade would be expected to mean at least a little knee-jerk reaction, but ANA sources agreed with reports elsewhere that the market appeared to have already factored in a downgrade.

As one analyst told ANA, “The big investors don’t wait for the ratings agencies; they make their own decisions based on their own research.” – African News Agency (ANA)

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