Johannesburg – Standard & Poor’s move to downgrade
the country has led to a selloff in bank shares and caused the rand to drop.
However, what else does SA’s position as a junk rated
country mean?
Investec has provided some pointers as to what effect
this may have:
l0 level1 lfo1">1. S&P
could also relook SA’s local currency rating, which is still a notch above
junk. Local currency ratings indicate how willing and able SA is to meet all of
its financial obligations on a timely basis, regardless of whether it owes
money in rands or another currency.
l0 level1 lfo1">2. The
downgrades will raise borrowing costs, undermine investor confidence, will likely reduce
the attractiveness of SA bonds at auction; and so negatively how easily SA
can borrow. This, in turn, will have a negative impact on SA’s government
finances, with government trying to trim how much money it owes and still spend
on infrastructure.
l0 level1 lfo1">3. Higher
borrowing costs increase the cost of repaying government debt, and without a
substantial, and sustainable curtailment in government expenditure and
rise in revenue, increase the chance of further credit downgrades. Upwards
pressure is placed on interest rates (weaker economic growth) and rand weakness
(as investors lose confidence and sell SA portfolio assets) which exacerbates
the situation, reducing further governments capacity for expenditure, including
existing social welfare grants.
l0 level1 lfo1">4. Pressure
will be placed on South Africa's cost of capital, the cash the country spends
on infrastructure projects, further dampening already-modest growth.”
l0 level1 lfo1">5. S&P’s
downgrades occurred outside the scheduled country review calendar. Moody’s has
signalled it could also move sooner on a downgrade than its planned April 7. Fitch
tends to be aligned with S&P, and so could also provide a sub investment
country credit rating for South Africa this year.
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