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Junk status is inevitable for South Africa, say economists

Should South Africa avoid having its credit rating cut to junk in the next two weeks, it could just be staving off the inevitable.

More than half of 12 economists surveyed by Bloomberg said S&P Global Ratings will strip the nation of its investment-level rating. The median probability of South Africa retaining its current assessment in December is 45%, falling to only 20% in 2017, the survey shows.

The economy faces a cut to junk on its foreign-currency credit rating as output is forecast to expand at the slowest pace this year since a 2009 recession, delaying the government’s plans to narrow the shortfall on the budget and rein in debt.

While the economic growth outlook has improved marginally and a similar Bloomberg poll six months ago showed 12 of 13 economists said the nation’s credit rating will be cut to junk by the end of the year, political turmoil, including now-dropped fraud charges against Finance Minister Pravin Gordhan, has overshadowed some the government’s efforts to boost investor and business confidence.

“I don’t think it’s high enough on the priority list that we are seeing enough being done,” Christie Viljoen, an economist at KPMG LLP in Cape Town, said on Thursday by phone. 

“It might be enough at the moment to avoid an immediate downgrade in December, but if it is avoided in December, it’s going to happen next year.”

Fitch visit
S&P is scheduled to announce its assessment, which is at the lowest investment grade and has a negative outlook, on December 2 and Moody’s will publish the review of its rating, currently one level higher than S&P’s, on November 25. Officials from Fitch, which has a stable outlook on its BBB- rating, visited South Africa this week and are concerned about the nation’s ability to stick to its fiscal targets and about the lack of economic growth, according to Deputy Finance Minister Mcebisi Jonas. Fitch hasn’t set a date for its assessment.

“We will be able to maintain the current expenditure ceiling, we think we will, and I dare say, we convinced them we can,” Jonas said on Thursday. 

“My sense is that there was general acceptance of our constraints and the good work we are doing.”

Gordhan has been leading efforts to avoid a downgrade to junk with meetings between the government, business and labour and by talking to foreign investors. However, the standoff between him and President Jacob Zuma over control of treasury and delays in passing new mining and anti-money laundering laws and overhauling employment legislation have fuelled perceptions of political turmoil and policy uncertainty that S&P and Fitch warned against in June when they left their ratings unchanged.

‘Moving sideways’ 
We aren’t deteriorating, we are just moving sideways at the bottom,” Thabi Leoka, an economist at Argon Asset Management in Johannesburg, said by phone. 

“The political noise is a problem and it’s the biggest risk, I even think that it’s a bigger risk than growth.”

A cut by S&P would move the company’s assessment of the nation’s creditworthiness to below investment grade for the first time in 16 years and put South Africa in line with Russia and Indonesia. Investors already consider South Africa more risky than Russia. The cost of insuring against non-payment of debt for five years using credit-default swaps is 23 basis points higher than for Russia.

Still, a cut to junk on the foreign-currency rating may not lead to significant forced bond selling by foreign investors.

South Africa’s local-currency ratings, which are usually referenced for inclusion in global benchmark indexes such as Citigroup’s World Government Bond Index, are several notches above junk. However, a foreign-currency downgrade may hurt sentiment and add to woes for the rand in a year of domestic political turmoil and emerging-market uncertainty fuelled by Brexit and the election of Donald Trump as United States president.

The currency weakened 0.7% to 14.5262 per dollar as of 1.57pm on Friday. Yields on rand-denominated government bonds due December 2026 rose 6 basis points to 9.05%.

“While S&P is likely to remain quite bearish and quite negative on South Africa, there is sufficient scope for them to keep our rating at a BBB- level,” Mohammed Nalla, head of strategic research at Nedbank, said by phone. 

“Potentially, this buys us another six months’ worth of time. It doesn’t mean we are out of the woods.” – Bloomberg

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