Johannesburg - As Finance Minister Pravin Gordhan seeks to reassure investors over SA’s economy and meets with ratings agencies in a bid to quell a ratings downgrade, an analyst notes the downgrade is already priced in.
Dr Adrian Saville, Citadel chief strategist, says that during the course of this year, there is a very good chance that at least one of the major ratings agencies will downgrade South Africa to junk status.
Read: SARB deputy warns on inflation
On Sunday, Gordhan told Business Report he met rating agencies on the sidelines of the International Monetary Fund (IMF) and World Bank spring meetings in Washington over the past weekend.
He told Business Report that, while the meeting with the agencies was on the margins, South Africa wanted to update investors on its economic revival programme.
Gordhan’s meeting with the agencies comes as the country awaits the outcome of the S&P and Fitch ratings review programmes next month and the escalating inflation outlook that last month breached the SA Reserve Bank’s 6 percent ceiling.
Read: Gordhan reassures investors
Statistics SA said inflation had hit 7 percent year on year in February compared with 6.2 percent in January – the highest rate since May 2009.
Meanwhile, South African Reserve Bank deputy governor Daniel Mminele has warned that a persistent breach of the inflation target will require a policy response, even as the country’s economic growth outlook weakens.
While South Africa has adopted a nine-point plan to invigorate growth and help appease the agencies, the country’s growth prospects are not promising, with the IMF now only forecasting 0.6 percent.
Investec economist Annabel Bishop notes SA’s investment grade was likely to be maintained for this year. “No downgrade to sub-investment grade this year is in our expected case, but forms a marker for our down case scenario,” Bishop says.
“On a cautionary note, should South Africa lose its investment grade status at its upcoming country reviews then the rand would likely see substantial weakness, moving back towards R17 to the dollar and then continuing towards R20 to the dollar.”
Saville notes there are a number of technicalities involved in any decision that will result in South Africa being rated junk, which could prevent the country from being pushed out of the World Government Bond Index (WGBI).
“Such an ejection would represent possibly the most dramatic outcome of a ratings downgrade and should be South Africa’s biggest cause for concern.”
Read: Some investors 'looking beyond Zuma'
Saville notes SA qualifies for a downgrade, but notes the country does have its strengths, such as the constitution, which was recently upheld over the Nkandla issue.
He adds local markets – equities, bonds and forex – have already priced in a downgrade. “By contrast, anything that points to South Africa staving off a downgrade or showing signs of stability and, ideally, structural strength, will help the rand, the bond market, other capital markets and, arguably, economic growth.
“To some extent, aspects of this already seems to be happening, with the rand and bond prices improving on the back of the appointment of Pravin Gordhan as Finance Minister, the reading of the government budget in February and the recent Constitutional Court ruling, among other things.”
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