/ 25 November 2017

Global credit ratings agency has downgraded South Africa to junk status

S&P said in its report that weak economic growth had led to deterioration in public finances beyond previous expectations.
S&P said in its report that weak economic growth had led to deterioration in public finances beyond previous expectations.

Credit ratings agency S&P Global has downgraded South Africa’s credit rating to full junk status, while its counterpart Moody’s has placed the country on review for downgrade.

The announcement came late on Friday night. It followed a similar announcement by third major ratings agency Fitch, affirming South Africa’s rating at sub-investment or junk status on Thursday.

The Moody’s decision to put South Africa on review, rather than downgrade it outright, is a temporary stay of execution, as it means that South Africa can, for now, remain in key global bond indices such as the Citigroup World Bond Index (WGBI). Moody’s holds South Africa local and foreign issued debt at one rung above junk .

Membership in the WGBI requires that either Moody’s or S&P Global rates a country’s local currency rating as investment grade.

But S&P lowered South Africa’s local currency rating to BB+, leaving it now at sub-investment grade, as well as lowering the foreign currency rating, which was already junk, a notch further to BB.

The agency said in its report that weak economic growth had led to deterioration in public finances beyond previous expectations. It also flagged the role politics had played in hamstringing policy.

“A momentous political agenda has overshadowed policy making, despite the deteriorating economy and weakening public finances,” it said.

It left South Africa’s ratings outlook at stable, saying that political instability could abate following the ANC’s December elective conference, which may help the government take measures to improve economic growth and stabilize public finances.

But it said that the rating could come under further pressure if standards of public governance slipped, such as more perceived attacks on the South African Reserve Bank’s independence.

Moody’s lead sovereign analyst for South Africa, Zuzana Brixiova, said its review was due to South Africa’s economic and fiscal challenges being more pronounced than Moody’s had previously assumed.

The agency also flagged political uncertainty as key to the country’s inability to tackle low growth and stabilize government finances

“Both low investor confidence and limited progress on structural reforms are rooted in the uncertainty created by the fluid and unpredictable political environment,” Brixiova said, adding that this was reflected in the lack of clarity over the government’s fiscal plans.

“Unclear and shifting policy objectives, political maneuvering and frequent changes of leadership in key ministries, and concerns over the pressures on the key policymaking institutions such as the Reserve Bank and the National Treasury, have weakened South Africa’s economy, finances and institutions,” said Brixiova.

The agency will only complete its review after the 2018 budget. This will allow it to factor in the outcome of the ANC conference.

“Political developments may provide insights into the direction, content and credibility of the future policy framework,” she said.

“The review period will therefore also allow Moody’s to take stock of the implications of political developments for key structural reforms that could boost investor confidence in the near term and support higher growth trends over the medium- and longer-term.”

This outcome is more positive than if both S&P and Moody’s had downgraded the local currency rating according to Ian Matthew head of business development at investment bank Bravura.

But he warned that S&P’s decision will see South Africa excluded from the Barclays Global Aggregate index, whose inclusion criteria requires investment grade rating on its local currency debt from any two ratings agencies.

South African debt has already been dropped from one of the widely used global bond indexes, the JPMorgan Emerging Market Bond Index Global according to Matthews.

“Foreign investors are already turning cold on South African bonds,” he said, with data from the JSE showing that daily outflows over the past month have averaged R134-million

The CEO Initiative said in a statement that the decisions were another blow to South Africa’s fragile economy.

“Two of the three major ratings agencies now have South Africa’s foreign and local currency government debt classified as so-called ‘junk’ with only Moody’s retaining their local currency rating at the lowest level of investment grade, and placing the country’s credit on review for a downgrade,” it said.

“This makes it more expensive for our government to borrow money, and it increases the amount of the government budget that will be spent on interest. Importantly: it reduces the money available for housing, education, healthcare and social grants.”

Jabu Mabuza, convenor of the CEO Initiative, said that all the negative ratings actions that the country has suffered “could and should have been avoided”, had the required structural reforms needed to sustain inclusive economic growth been implemented in the interests of all South Africans.

Little of the work done by the initiative developing a plan to avoid these downgrades had been implemented he said, adding that, instead political and policy uncertainty increased.

Policy uncertainty, such as the introduction of the controversial new Mining Charter; the deterioration at major state owned entities; the fiscal slippage revealed in the October adjustments budget, and ongoing allegations of corruption all contributed to this environment he said.