SA’s credit rating could drop

2014-06-06 13:13

The risk of a credit-rating downgrade for South Africa next week is rising as a five-month strike by platinum miners drags down economic growth and curbs exports, according to Morgan Stanley.

The cost of insuring South African bonds against default for five years using credit default swaps climbed 19 basis points this week to 191, the highest level in almost two months and the biggest increase out of 25 developed and emerging nations monitored by Bloomberg. Benchmark December 2026 bond yields jumped 16 basis points since falling to this year’s low on May 22, the most among major developing markets.

South Africa’s gross domestic product contracted in the quarter through March for the first time since the 2009 recession as work stoppages caused mining production to plunge by the most in 47 years.

Standard & Poor’s, which cited weak growth, labour unrest and rising government debt among reasons for maintaining its negative outlook on the nation in December, will announce the result of its sovereign review on June 13, the same day as Fitch Ratings.

“Labour disputes, weak growth, debt metrics – none of those things have improved,” Asher Lipson, a fixed-income strategist at Standard Bank Group, Africa’s biggest lender, said by phone from Joburg yesterday.

“The big thing is obviously weak growth, because that’s going to affect your revenue forecasts and your debt metrics. It’s going to make the ratings agencies more negative.”

S&P will probably lower the local-currency rating to BBB+ from A-, and there’s a “better-than-50%” chance of a foreign-currency rating cut to BBB-, the lowest investment-grade category, Lipson said. Fitch may change its outlook to negative from stable, while maintaining its BBB rating, on par with Iceland and Bahrain, he said.

The platinum companies and the union representing 70 000 striking workers remain divided over how to resolve the dispute, according to two people familiar with the negotiations.

Anglo American Platinum, Impala Platinum Holdings and Lonmin are in talks with the labour group coordinated by Minister of Mineral Resources Ngoako Ramatlhodi.

The economy shrank an annual 0.6% in the first quarter after expanding 3.8% the prior three months, a report said on May 27. Commodities including metals accounted for 60% of South Africa’s exports in 2013, according to government data.

Weak growth is casting doubt on the government’s promise to curb the fiscal deficit, while the loss of mining output is delaying the narrowing of the current-account gap, according to Morgan Stanley.

A cut by S&P to South Africa’s local-currency rating is likely and there’s rising risk of a foreign-currency downgrade, Morgan Stanley said in a June 4 report.

“The reality is that the ongoing stalemate in the mining sector has lasted for much longer than most expected, and now threatens to have a meaningful impact on exports in coming months,” Michael Kafe, an economist in Joburg at the New York-based bank, said in the report. “A downgrade to both local and international ratings cannot be ruled out at this stage.”

South Africa’s trade deficit unexpectedly widened 9.4% to R13 billion in April from a month earlier, while the current-account shortfall was 5.1% of GDP in the fourth quarter of 2013.

Yields on government bonds due December 2026 dropped five basis points, or 0.05 of a percentage point, to 8.27% by 10.44am in Johannesburg, and the rand gained 0.4% to 10.6473 per dollar. Emerging-market bonds and currencies rallied after the European Central Bank cut interest rates yesterday.

“The market is certainly a lot more cautious in recent days,” Michael Grobler, who helps manage the equivalent of about $340 million in fixed-income investments at Atlantic Asset Management in Cape Town, said in an email yesterday. “There is a risk of a downgrade in the debt rating.”

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