Johannesburg - South Africa might be just hours away from losing its
investment-grade at S&P Global Ratings -- a relegation that could take
years to undo.
With a credit assessment due on Friday, the country’s
foreign-currency debt is at risk of being rated junk by S&P for the first
time in more than 16 years. Only six of 20 countries reduced below investment
grade by S&P over the last three decades have regained it, and that took
from 13 months to more than 11 years, data compiled by Bloomberg show. Seven of
12 economists surveyed by Bloomberg last month said the nation’s
foreign-currency rating will be downgraded to junk on Friday, while three
foresee it happening in June.
Political turmoil in Africa’s most-industrialized
economy, including now-dropped fraud charges against Finance Minister Pravin
Gordhan, has overshadowed efforts to boost investor and business confidence.
The slowest gross domestic product growth this year since a 2009 recession will
complicate Gordhan’s pledge to narrow the budget deficit and to limit
government debt, while promised structural reforms have been hampered by
infighting in the ruling African National Congress and government departments.
“If South Africa does get a downgrade, I think we are
looking at at least three to five years before it could possibly get upgraded
again,” Per Hammarlund, chief emerging-market strategist at SEB SA in
Stockholm, said by phone. “Given the way politics are moving now, it seems as
if the political paralysis will continue and that doesn’t bode well for
economic reforms.”
Negative outlook
Fitch Ratings on November 25 changed the outlook on its
BBB- rating, which is one level above junk, to negative from stable and warned
that continued political instability could result in a downgrade. Later the
same day, Moody’s Investors Service, which rates South Africa’s debt at the
second-lowest investment grade level, with a negative outlook, said in a credit
opinion political infighting that generates policy uncertainty and impedes
structural reforms could lead to a cut.
Read also: Junk rating inevitable for SA?
While a reduction to junk on the foreign-currency rating
may hurt sentiment and add to woes for the rand in a year of emerging-market
uncertainty -- fueled by Brexit and the election of Donald Trump as US president -- it won’t necessarily 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 still above junk, even after Fitch cut its
assessment to the lowest investment-grade level in July.
“We think S&P will look to downgrade the country’s
local-currency rating on Friday from the current BBB+,” Jeffrey Schultz, a
senior economist at BNP Paribas Securities in Johannesburg, said an e-mailed
note. “Such a move, we believe, would serve as a warning signal that S&P is
uncomfortable with the direction in which South Africa’s debt-to-GDP ratio is
moving and that should structural economic reforms not materialize to boost
growth before June next year, a foreign-currency downgrade is inevitable.”
Higher risk
A cut by S&P would move the company’s rating of the
nation’s foreign-currency debt to the same level as Russia and Portugal. Investors
already consider South Africa more risky than Russia, with the cost of insuring
against non-payment of debt for five years using credit-default swaps 15 basis
points higher than for that country. The rand strengthened 0.3 percent to
14.07 per dollar by 8:15 a.m. in Johannesburg.
Gordhan, 67, has led efforts to stave off a downgrade
while wrangling with President Jacob Zuma over the management of state-owned
companies and the national tax agency. A failed bid at the ANC’s National
Executive Committee meeting this week to oust Zuma increased speculation he
will be replaced as the nation’s president.
Read also: SA must avoid junk at all costs - Mogoeng
The economy will probably expand 0.4 percent this year,
according to the central bank. That will make it difficult for Gordhan’s to
meet his target to narrow the budget deficit to 2.5 percent of gross GDP by
2020, from a projected 3.4 percent this year, and to rein in gross government
debt that’s forecast to peak at 53 percent of GDP in the year through March
2019.
“The past has shown that regaining an investment-grade
rating isn’t easy,” George Herman, head of South Africa investments at Citadel
Investment Services in Cape Town, said. “We need some structural changes in the
economy to improve growth, but those are going to take tough political
decisions.”