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:
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.
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.
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.
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.”
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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