S&P Global Ratings cut South Africa’s local-currency debt score to junk on Friday, while Moody’s Investors Service also threatened to slash its ranking to the same level, raising the risk of a selloff from global indexes.
S&P lowered the country’s local-currency rating one step to BB+, one level below investment grade, and placed it on a stable outlook. Its assessment on South Africa’s foreign-currency debt, which it already considered speculative, was taken down one notch to BB. Moody’s opted to keep both readings on Baa3, its lowest investment grade, but put them on review for possible downgrade.
The reduction by S&P “reflects our opinion of further deterioration of South Africa’s economic outlook and its public finances,” the company said in a statement. “Economic decisions in recent years have largely focused on the distribution — rather than the growth of — national income. As a consequence, South Africa’s economy has stagnated and external competitiveness has eroded.”
Should Moody’s also downgrade the local-currency rating, rand debt would fall out of gauges including Citigroup Inc.’s World Government Bond Index, and this could spark outflows of as much as 100 billion rand ($7 billion), Citigroup economist Gina Schoeman said ahead of the rating company announcements. A selloff of rand bonds — which comprise about 90 percent of South Africa’s outstanding liabilities — would raise borrowing costs for the nation as it sells more debt to plug a widening budget gap.
“This credit action will result in increased volatility going forward as certain global passive investors need to rebalance their exposure to the sovereign credit,” Absa Investment Management said in a research note Saturday. “Since it is likely to be the precursor to exclusion from the WGBI, investor positioning could pre-hedge by selling SA bonds and offset any positive market reaction.”
“Government is working urgently and diligently on practical steps to provide the necessary policy certainty, environment conducive to investment, and predictability that the country so desperately needs,” the National Treasury said in an emailed statement Saturday.
The government is considering measures over the next two weeks that will combine tax increases and spending cuts to save 40 billion rand in the 2019 fiscal year, the Treasury said. It will provide more information in the budget that’s due for release in February.
The rand fell as much as 2 percent to 14.1585 per dollar Friday, and has lost 7.5 percent of its value since the middle of the year.
Fitch Ratings on Thursday affirmed South Africa’s foreign and local debt scores at its highest non-investment grade with a stable outlook.
Conflict in the ruling party in the run-up to its leadership election next month has hamstrung efforts to bolster Africa’s most-industrialized economy, which had its second recession in less than a decade earlier this year. Business confidence is near the lowest level in more than three decades amid allegations of corruption against state company managers and “politicians including President Jacob Zuma.
“Many economic and political problems South Africans experience are rooted in corruption, state capture and political patronage resulting in trust deficit,” Bonang Mohale, the chief executive office of Business Leadership South Africa, which represents about 80 of the country’s biggest companies, said by email. Until state institutions are independent, the government abandons nuclear-energy plans and it provides clear mining-industry rules, “the trust deficit will persist,” he said.
While the outcome of the ruling African National Congress’s elective conference next month will be of interest to ratings companies, they’ll also be watching the February budget for more information on the nation’s debt trajectory.
Moody’s said it may not conclude its review until the size and composition of that budget is known and that it will assess the government’s “willingness and ability to respond to rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures.”
It will be “very difficult” for the South African Treasury to come up with the kind of “magic tools” needed to stop a downgrade by Moody’s, said Thabi Leoka, an economist at Argon Asset Management in Johannesburg. “It’s 90 days or bust and they can actually make a move before the 90 days.”