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Downgrades lift financing costs

A wholesale downgrading of large state-owned entities by Moody’s Investors Service late on Monday means South Africa will pay more for funding.

Casualties of the rating agency’s sweeping action include the cities of Johannesburg, Cape Town, Tshwane and nine other municipalities, the East Rand Water Care Company and state-owned Eskom.

Moodys. Credit: REUTERS

Seven other local governments had their rating outlooks changed to negative from stable.

Moody’s also cut by one notch telecoms operator Telkom, part-owned by the government, and changed the outlook of mining company Gold Fields from positive to stable due to “weakening trends in the mining sector”.

Miners at Gold Fields’ Kloof-Driefontein Complex West mine near Carletonville have been on an unprotected strike for three weeks, demanding pay of R12 500 a month.

Moody’s said the sub-sovereign ratings and that of Telkom had been moved in line with the downgrade last week of the government’s bond rating from A3 to Baa1. Moody’s noted “close operational and financial linkages with [the] national government”.

Reserve Bank governor Gill Marcus said it was too soon to quantify the spill-over effects of the downgrades on the rest of the economy. Speaking at a Nordic-South African Business Association event yesterday, she noted that many of the entities had already arranged their financing. But she said eventually the higher interest bill would increase their costs.

The higher costs will presumably be passed on to ratepayers and consumers.

Investec Asset Management co-head of fixed income André Roux said the other major rating agencies, Standard & Poor’s and Fitch, could downgrade South Africa although he believed they would wait until after the ANC electoral conference in December.

In the event that all three agencies cut South Africa’s sovereign rating by one notch it would mean that “the approximately R120 billion of net issuance planned by the government for next year would cost, over the lifetime of the bonds, about R2bn more than would have been the case in the absence of the downgrade”.

The additional costs will be met by taxpayers.

Investec capital market economist Tertia Jacobs said yields on South Africa’s international bonds had not responded yesterday to the batch of downgrades. And the cost of insuring debt through credit default swaps had not reacted.

Jacobs noted that Moody’s rating had been one notch ahead of the other agencies and the sovereign rating was now in line with the others.

Nedbank Capital strategic analyst Mohammed Nalla said governance issues would “differentiate different municipalities”. Moreover, the linkages between the sovereign and the municipalities differed.

Nalla said the transmission effect from market rates to the Reserve Bank’s official repo rate was not clear but there could be some spillover.

The sovereign premium would also be applied to corporates listed on the JSE but the impact would vary depending on the extent to which their operations were diversified internationally, Nalla added.

Marcus said R84bn had been placed by non-residents in the local bond market this year. Although the flows would not continue at the same pace they would not dry up. She said global institutional investors would continue to turn to emerging markets to earn worthwhile returns.

After a poor performance on Friday, foreign bond inflows lifted on Monday with purchases of nearly R6bn, Citi strategist Leon Myburgh said. This followed South Africa’s inclusion in the Citi World Government Bond index that day.

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