Johannesburg - South African assets may gain as they move back in line with investment-grade countries after getting a six-month reprieve from S&P Global Ratings from possibly being cut to junk status.
S&P affirmed South Africa’s BBB- rating, on par with India and Italy, with a negative outlook, on June 3 and warned it could cut the assessment if the economy doesn’t improve. While the probability of a downgrade to junk in December hasn’t diminished, the rating affirmation gives South Africa time to deliver on promises made at the start of the year and for local assets to recover, according to Roxana Hulea, an emerging-market strategist for Societe Generale SA in London.
Read: Ratings reprieve: SA needs action now
Slow economic growth and political upheaval including court rulings against President Jacob Zuma and reports that Finance Minister Pravin Gordhan could be prosecuted have weighed on South African asset prices and eroded sentiment. The cost of insuring against non-payment of debt for five years using credit-default swaps is 104 basis points higher than for Indonesia and is also higher than that of Russia and Turkey, all of which are rated speculative grade by S&P, according to data compiled by Bloomberg.
“The way South Africa is priced right now is a solid one notch lower, it’s priced already as sub-investment grade,” Hulea said by phone. “With calmed expectations about an imminent downgrade, we should see the CDS and sovereign bonds repricing that risk.”
After the decision on Friday, the rand gained as much as 3.3 percent against the dollar, the biggest advance in the currency since Dec. 14, the day after Gordhan was appointed as finance minister, replacing a little known lawmaker appointed four days earlier. Yields on benchmark 2026 government rand bonds dropped 14 basis points, and fell a further 4 points to 9.13 percent on Monday. With the risk of an imminent downgrade out of the way for now, the bond yields could decline another 20 points, while CDS contracts could narrow 40 points to levels closer to Turkey’s, Hulea said.
Read: Zuma welcomes S&P rating affirmation
While the nation maintained its investment grade for now economic growth forecast at the slowest pace since the 2009 recession, according to the government and central bank, will keep pressure on the rating. A government report on Wednesday will probably show the economy contracted an annualised 0.1 percent in the three months through March, according to the median of 15 economist estimates compiled by Bloomberg.
Gordhan was re-appointed in December to the position he held from 2009 until 2014 after business and ruling-party leaders forced Zuma to reconsider a decision to replace Nhlanhla Nene as finance minister with little-known David van Rooyen. The next six months are “critical” to implement measures to boost the economy, the Treasury said after S&P’s announcement.
“The outlook for the economy remains fairly bleak and it remains to be seen whether there is sufficient support among prominent ANC officials for Finance Minister Gordhan to strengthen public finances and implement structural reforms,” Piotr Matys, an emerging-market currency strategist at Rabobank in London, said by email.
Moody’s Investors Service kept its assessment of the country’s creditworthiness at two levels above junk last month, after putting it on review for a downgrade. Fitch Ratings has reviewed its BBB- rating, on which it has a stable outlook, in recent weeks and hasn’t said when it will publish the results of its analysis.
“Markets can sometimes be charitable, they can give you the benefit of the doubt,” Mohammed Nalla, head of strategic research at Nedbank, said by phone from Johannesburg. “Unfortunately, South Africa’s lost the ability to get enough of the benefit of the doubt following what happened in December last year.”
* With assistance from Simbarashe Gumbo
BLOOMBERG