Slip in South African credit ratings calls for reform

Published Nov 27, 2017



Africa’s exclusion from the Barclays Global Aggregate Index (BGAI) following Friday’s decision by S&P Global Ratings to lower the country’s foreign and local currency ratings by one notch will cost the economy up to $1.5billion (R20.8bn).

S&P’s latest credit review meant South Africa would now fall out of the BGAI.

RMB Morgan Stanley said the country’s exclusion from the BGAI would result in passive outflows of up to $1.5bn based on Turkey’s experience and the size of the South African bond market.

S&P said its decision to downgrade South Africa was on the back of what it termed “further deterioration of South Africa’s economic outlook and its public finances”.

The rating agency, however, moved its outlook on South Africa from negative to stable.

Tumisho Grater, an economic strategist at Novare Actuaries and Consultants, said the short-term impact of S&P’s decision on the bond market would depend on how much was already priced into the markets and whether the buyers of these bonds are residents or non-residents.

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“The slip in the credit ratings increases the calls for reforms even louder, and falling deeper into the red in the instance that Moody’s follows suit after the 2018 February Budget may lead to more aggressive falls in the rand, government bonds, and business and consumer confidence,” Grater said.

Earlier this year, South Africa fell out of the JP Morgan Emerging Markets Index following the downgrades that occurred after the April cabinet reshuffle.

90-day review

South Africa’s saving grace on Friday was the stay of execution given to it by Moody’s Investor Services.

Moody’s kept its Baa3 rating for the country intact, but it placed South Africa on 90-day review for a downgrade.

Moody’s said its decision was based on a series of recent developments which suggested that South Africa’s economic and fiscal challenges were more pronounced than it had previously assumed.

A day earlier, Fitch affirmed the country’s long-term foreign and local currency at BB+ and maintained a stable outlook.

All three agencies said additional outlays to cash-strapped state-owned enterprises could trigger negative ratings action.

S&P said it expected further increase in appropriations for cash-bleeding Eskom due to the power utility’s weak financial position.

Sanisha Packirisamy, an economist at Momentum Investments, said rand hedge assets can reasonably be expected to outperform in a ratings downgrade environment.

“These include global assets and the local equity market due to the latter’s dominance by foreign-driven earnings.”

“In contrast, domestic fixed-income-related assets such as bonds and listed property are likely to suffer during a ratings downgrade period,” Packirisamy said.

The worst-case scenario for South Africa was if Moody’s had also dropped South Africa’s rating by one notch to sub-investment grade. That decision would have resulted in the country falling out of the Citi World Global Aggregate Bond Index (WGBI). RMB Morgan Stanley said that if South Africa fell out of the WGBI, it would expect $5bn in outflows.


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