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JOHANNESBURG - The decision by ratings agencies, S&P Global Ratings and Moody’s Investors Service, on South Africa’s sovereign ratings on Friday will be crucial next week.

If either cut their local currency ratings, the government’s R1.8 trillion stock of rand-denominated debt will no longer be allowed to be kept by asset managers whose mandates specify that they may hold only investment grade bonds rated by at least two out of the three major ratings agencies. 

Fitch Ratings, the other major ratings agency, has already cut both South Africa’s local currency and foreign currency government debt into the non-investment grade category. 

If a ratings downgrade were to take place, then there would almost certainly be widespread selling by foreign asset managers, driving up the governments’ borrowing costs and weakening the rand. Around R150 billion of South African government bond holdings may be sold by foreign asset managers if South African government bonds are no longer included in Citi’s World Government Bond Index (WGBI), the biggest of the global bond benchmarks.

The downgrade fears have been prompted by last month’s Medium-Term Budget Policy Statement, which saw the National Treasury increase its fiscal deficit forecast for this fiscal year to 4.3percent of gross domestic product (GDP) from 3.1percent forecast in the February Budget. 

Finance Minister Malusi Gigaba said the increase in the fiscal deficit was due to a R50.8 billion revenue shortfall, as well as costly bailouts to struggling state-owned enterprises such as SAA. 

- BUSINESS REPORT