Credit Rating: Where we’re at and what to know about junk status
JOHANNESBURG – Ina March 2019, when ratings agency Moody’s kept South Africa’s sovereign debt at above investment grade, and changed its outlook to “stable”, it was the only ratings agency at that time to keep our country from “junk status” – in other words, above what is considered substantial investment-grade risk.
At the time Moody’s said: “The confirmation of South Africa’s ratings reflects (our) view that the previous weakening of (its) institutions will gradually reverse under a more transparent and predictable policy framework. The recovery of the country’s institutions will… gradually support a… recovery in its economy, along with a stabilisation of fiscal strength.”
But this has not happened and Moody’s is scheduled to review our credit rating next month. At this point, many economists predict that South Africa’s credit outlook will change to “negative”.
This despite the fact that Moody’s senior analyst Lucie Villa has pointed to South Africa’s stable economic outlook, strong institutions and reasonably good foreign currency reserves, even though serious issues continue to surround Eskom.
So how’s it looking for South Africa?
Despite the “Ramaphoria” at the end of the tumultuous Zuma reign, when we looked forward to a more economically stable era under President Cyril Ramaphosa, there’s no indication that South Africa will soon curb our rising debt levels.
There’s also growing frustration that the ongoing factional battles in the ANC are hampering Ramaphosa’s ability to make the reform decisions that are needed to resuscitate our economy, including: stabilising the rising debt-to-GDP (gross domestic product) ratio, addressing high unemployment, tackling the low economic growth rate, restructuring state-owned enterprises, reducing the public sector wage bill and cutting state spending.
What’s happening elsewhere?
Circumstantial evidence from other countries downgraded to junk status shows that the after-effects can hasten an economic crisis, as in Egypt in 2001, Tunisia in 2012 and Brazil in 2015.
Furthermore, significant social and economic instability is likely to follow any downgrade to junk status, and things are already volatile here at home.
What are the financial implications?
South Africa would no longer be eligible to be included in debt gauges such as Citigroup’s World Government Bond Index (WGBI), which could trigger a major outflow of money – which is estimated to be R100 billion.
In the event of a downgrade, the government has to pay more in debt servicing costs, meaning that it has less to spend on social initiatives and infrastructure.
To plug the funding gap, the government has to increase revenue through higher taxes. However, with corporates already taxed to the hilt, personal tax is likely to be where the government will seek recovery.
Further, with the forthcoming National Health Insurance (NHI), there are indications that the public will experience one of, or a mix of, general tax revenue increases, payroll taxes, and surcharges on personal income tax.
A downgrade will probably also cause the rand to depreciate, which will make imports such as oil – and in turn, everything else – more expensive.
When inflation rises above a designated target range, the SA Reserve Bank increases the repo rate, which raises the cost of vehicle loans, home loans, and other long-term loans.
And, when lenders see a greater risk in borrowers defaulting, they increase premiums to compensate for it.
As a result South Africans will find it harder to qualify for new loans, and when they do manage to access credit, it will be more expensive – meaning that loans will be less of an option for individuals when their finances are stretched.
When it comes to property, the “wait-and-see” approach is something South African homeowners have become adept at using, paying in the interim for increases in annual council services and fluctuations in fuel prices.
In the event of a higher interest rate environment, all other South African entities from the large state-owned companies such as Eskom to the large private companies including mining firms and banks, will have to pay more for any money they borrow.
They will have less money to spend in expanding their businesses and employing more people or will try to put up their prices.
Is junk status likely to be forever?
No, but it takes a long time for a country to return to investment grade.
According to Gardner Rusike, a sovereign analyst for South Africa at S&P, the firm’s ratings history shows that it can take seven to eight years to come back to investment grade.
Stanlib chief economist Kevin Lings pointed out in 2016 that sovereign downgrades outnumbered upgrades in the preceding eight years, so there’s a trend.
The average sovereign credit rating across the world has fallen by about one notch since 2008 and, since 2012, S&P has downgraded South Africa three times.
However, this does not mean that we should, or indeed, can afford to be, complacent about further credit ratings agency downgrades.
Greg Morris is chief executive of Sebata Holdings.