‘SA investment rating not under threat’

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FitchRatings

Reuters.

A plaque is pictured at the entrance of the Fitch offices.

Johannesburg - Although Fitch on Thursday joined the other two major international ratings agencies in cutting SA’s sovereign credit rating‚ its investment rating was not under threat‚ according to analysts.

Moody’s downgraded SA in late September 2012 and Standard & Poor’s (S&P) in mid-October 2012.

The investment rating meant for instance that SA government bonds are included in the World Government Bond Index (WGBI)‚ which last year resulted in foreigners buying a net R85.373 billion worth of SA bonds.

Without this capital inflow to finance a large current account deficit‚ the rand would be much weaker‚ inflation higher and economic conditions more stressed.

Absa Capital said that slower economic growth – delivered in part by the continuing difficult global environment‚ but also as SA struggles for competitiveness – cast a shadow over public finances and on employment and equality.

“The Fitch announcement does not threaten SA’s inclusion in the benchmark indices‚” Absa Capital said.

The benchmark R186 bond closed at a record low yield of 7.09% on Thursday before the Fitch announcement.

The R186 yield closed at 7.265% at the end of 2012 from 8.4700% at the end of 2011. The main reason for foreign demand in 2012 was the decision by Citibank to include SA government bonds in the WGBI.

This was announced on April 17 2012. On April 16‚ the R186 yield closed at 8.42%.

Statistics SA in November reported that third quarter real gross domestic product growth slowed to 1.2% quarter on quarter (q/q) seasonally adjusted and annualised in the third quarter from 3.4% in the second quarter‚ while real retail sales growth slowed to 1.0% year on year (y/y) in October from 4.7% y/y in September and 6.7% y/y in August.

The National Treasury said last month that personal income tax collections‚ which is the largest individual component of tax revenue‚ slowed to a 3.0% y/y increase in November from an eight month average of 9.6% y/y‚ while the October 2012 forecast was for a 14.2% increase in the full fiscal year that ends in March 2013.

The second largest component‚ namely value added tax (VAT) collections‚ had a 1.4% y/y decline in November‚ although its eight month average of 11.8% is slightly above the forecast of 9.8% for the full fiscal year.

RMB said that a rating upgrade by any of the agencies remained a tall order as it would require much stronger growth‚ a notable decline in the budget and current account deficits and structural reforms‚ particularly in the labour market.

“The investment grade rating is supported by the robustness of the banking system‚ the liquidity in the local bond market‚ the floating exchange rate and flexible inflation-targeting regime‚” RMB said.

The National Treasury said the government was aware of the challenges of poverty and unemployment the country is facing.

“The budget framework set out in the Medium Term Budget Policy Statement demonstrates government’s unambiguous commitment to maintaining debt and expenditure growth within sustainable levels. These principles will continue to underpin South Africa’s fiscal stance‚” the Treasury said in its reaction to the Fitch downgrade.

Nomura International was worried that many of the negative rating sensitivities that Fitch highlights come true – in particular that there is a failure to generate faster employment growth‚ structural reforms remain slow and so there is little improvement in competitiveness.

“The mining tax uncertainty that remains after Mangaung is also seen as a key negative by the agency‚” Peter Attard Montalto said.

“The impact of this move on markets is likely to be minimal‚ however‚ given we are not at a benchmark or real money mandate threshold‚” he concluded. - I-Net Bridge


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