What are the chances: SA's R100bn ratings double jeopardy

Johannesburg - South Africa will confront the threat of a debt selloff of about R100bn ($7bn) this week as it awaits two concurrent judgments on its credit status.

Opinion among economists is divided as to how stark a danger that is. Fifty-six percent of respondents in a Bloomberg survey said S&P Ratings will reduce its assessment to the highest non-investment grade on Friday. Moody’s Investors Service, which is scheduled to make a decision, will likely leave it unchanged, according to three-quarters of those asked.

Will S&P cut?

  • Yes: 9
  • No: 7

Will Moody’s cut?

  • Yes: 4
  • No: 12

Should both companies cut, rand debt would fall out of gauges including Citigroup’s World Government Bond Index, sparking outflows of R80bn to R100bn, Citigroup economist Gina Schoeman said. This would raise borrowing costs for the nation that’s selling more debt to plug a widening budget gap.

Conflict in the ruling party in the run-up to its leadership election next month has hamstrung efforts to bolster the Africa’s most-industrialised economy, which had its second recession in less than a decade earlier this year. Business confidence is near the lowest in more than three decades amid allegations of corruption against state companies’ managers and politicians including President Jacob Zuma.

“Given the fraught political context in which South Africa finds itself, alongside the negative repercussions of downgrades in triggering ejection from key bond indices, we believe that the rating agencies will not rush to cement decisions to downgrade this month,” said Phoenix Kalen, director for emerging-markets strategy at Societe Generale SA in London.

The sustainability of the nation’s debt will be at risk unless government presents a credible fiscal-consolidation plan in 2018, Moody’s said after the mid-term budget last month.

While the outcome of the ruling African National Congress’s elective conference next month will be of interest to ratings companies, it’s the February budget that they’ll be watching for clues on the country’s debt direction, said Annabel Bishop, the chief economist at Investec Bank.

Fiscal detail

“The budget will provide the fiscal detail that was lacking in the 2017 medium-term budget policy statement, which is needed in assessing South Africa’s creditworthiness,” she said. “The likelihood has increased for South Africa to lose its remaining investment-grade ratings.”

Investors are pricing in a downgrade of South Africa’s debt, with yields on dollar securities surpassing those of lower-rated countries such as Brazil and Russia.

Still, investors’ search for higher yields could help counter some of the expected outflows, Citigroup’s Schoeman said.

S&P and Fitch Ratings both rate South Africa’s foreign-currency debt at the highest non-investment grade. They lowered their assessments within a week of Zuma’s March 31 replacement of then Finance Minister Pravin Gordhan with Malusi Gigaba.

Moody’s, which has South Africa’s foreign-currency rating at the lowest investment grade, won’t lower its assessment, 10 of 16 respondents in the Bloomberg survey said.

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