The fears in the markets, which became more pronounced after last month’s underwhelming medium-term budget policy statement, is that further downgrades will have negative implications for borrowing costs and confidence.
Mamello Matikinca, a senior economist at FNB, said that in isolation, the October budget review was enough for the rating agencies to downgrade the local currency to Ba1 and BB+, respectively.
“While the local currency ratings are the ones to watch, Moody’s may opt to lower the country’s foreign currency rating to Ba1 in line with S&P and Fitch, with both Moody’s and S&P holding the local currency rating steady until greater clarity emerges from the ANC elective conference and the Budget in February,” Matikinca said.
A downgrade of SA’s local currency credit rating to sub- investment grade by Moody’s and S&P would result in the exclusion of South Africa’s rand-denominated bonds from key global bond indices such as the Citi World Government Bond Index (Wigbi).
According to Citi, exclusion from the Wigbi would occur the very next month after a downgrade by both Moody’s and S&P.
Citi estimates Wigbi-related outflows as upwards of R85billion. Carlos Teixeira, a research analyst at Credit Suisse, said that on a cold analysis of key macro and fiscal metrics, the sovereign’s long-term domestic debt rating should be sub-investment grade.
“Recent developments - the apparent search for additional funding for tertiary education, the resignation of a key National Treasury official (supposedly in response) and Eskom’s likely need for additional funding from the Treasury - have further raised the risk that the agencies will downgrade the sovereign on November 24,” Teixeira said.
Fears are that if the agencies downgrade the country’s local currency debt, the impending interest rate hike by the US Fed will act as a double whammy that will keep South Africa’s economy in prolonged doldrums.
Further rate hikes
Last week, Eric Rosengren, the Boston Fed president who also serves on the US Fed, said the strong US economy called for further interest rates hikes, including next month.
The Fed has already raised rates twice this year. His views found support from October’s positive US inflation and retail sales figures, which solidified dominant views that the US economy was ready for further rate hikes.
Asief Mohamed, the chief investment officer at Aeon Investment Management, said the expected 0.25percentage-point increase in interest rates by the US Fed was not expected to have a material impact at this stage on South African interest rates.
“If the US Fed keeps on hiking rates in 2018 by 0.25% four times, then South African and emerging market interest rates, both short term and long term will most likely increase,” Mohamed said.
The Reserve Bank’s last monetary policy committee meeting of the year is also expected to take centre stage, which will be preceded by the release of October’s inflation data by Statistics SA.
Kamilla Kaplan, an economist at Investec, said the rand exchange rate, pending electricity tariffs and the pace of global monetary policy normalisation. meant the SA Reserve Bank would again keep interest rates on hold this week.