Fitch downgrade a fresh blow as country battles Covid-19 fallout, but does not join 20 SSA countries asking IMF for help
South Africa is not one of the 20-odd countries in Africa south of the Sahara (SSA) that have asked the International Monetary Fund (IMF) for emergency financing, the institution has said.
But Treasury on Friday said that government was “investigating all financing options” to fund programmes and measures related to combating the Covid-19 coronavirus pandemic.
“These options are not limited to the local market, but include our partners worldwide,” Treasury said, in a response to a query from City Press’ sister publication, Rapport.
In another blow to South Africa’s economic outlook, agency Fitch Ratings on Friday dropped South Africa’s investment grade further into negative territory, to ‘BB’ from ‘BB+’ , citing “the lack of a clear path towards government’s debt stabilisation as well as the expected impact of the coronavirus shock on public finances and economic growth”.
Treasury noted the downgrade and said: “Government reiterates its commitment to implement structural economic reforms to address the weak economic growth, constrained fiscus and ailing state-owned companies.”
Additionally, Treasury noted: “Despite the downgrade and severe disruption in global financial markets, Fitch acknowledges South Africa’s resilience to external shocks.
The agency says: ‘We do not expect acute problems in fiscal financing, partly reflecting the unusually long-average maturity of government securities [15 years] and the low share of foreign currency debt in total debt [10%].’”
Finance Minister Tito Mboweni said: “To assure all South Africans, government is seized with addressing and minimising the impact of Covid-19, implementing measures to improve economic growth and setting government finances on a sustainable trajectory. This work requires close collaboration and coordination across various sectors of the economy.”
Gediminas Vilkas, a senior communication officer at the IMF, this week told Rapport that the IMF expected a further 10 or so countries to approach it for assistance in the coming days.
Kristalina Georgieva, managing director of the IMF, last week said the Covid-19 pandemic was worse that the global financial crisis of 2008 to 2009, and that 50 low-income countries had already approached the fund for help.
According to conservative estimates, it will cost $2 500 billion (R47 530 billion) to help them. More than 31 middle-income countries have also reached out to the IMF.
According to Vilkas, the IMF was in discussion with all its members in the SSA region, including South Africa, to determine what their needs were and to see where assistance could be quickly provided in the form of policy advice, technical assistance or financing.
The IMF would make at least $50 billion in emergency funds available, which it would be able to pay out quickly. This included $10 billion for low-income countries, which would be based on “concessional requirements”.
Since the credit rating agency Moody’s Investors Service downgraded South Africa’s sovereign debt to “junk” status (which will make it more expensive for South Africa to borrow money on the open market), a fresh debate has been sparked about whether South Africa should approach the IMF for assistance.
Moody’s is of the opinion that South Africa’s debt could be at 91% of GDP by 2023.
David Knee, Prudential chief investment officer, recently wrote in an investment article that studies after the global financial crisis indicated that, once a country’s debt-to-GDP ratio climbed above 90%, incurring more debt could have a negative impact on economic activity.
However, this depended on the degree to which the country’s debt was in foreign currency.
Only about 10% of South Africa’s state debt is in foreign currency units, which puts us in a better position than many other countries.
RW Johnson, a British journalist and author living in South Africa, wrote in an opinion piece on PoliticsWeb last week that interest in South African government bonds dried up in the week of March 24, forcing the SA Reserve Bank to intervene and buy bonds in the secondary market.
The government auctions bonds on a weekly basis in order to finance the budget deficit and then pays a yield to the bondholder for the duration of the bond.
The lower the price of government bonds, the higher the yield rate, and the more beneficial it is for the investor.
According to Johnson, a deficit in demand for a country’s government bonds was one of the ways that a country could land in a situation where it couldn’t pay its debts.
“[This is what] occurred in South Africa’s bond market last week,” he wrote on March 28.
The Covid-19 panic caused foreign investors to rush to dollar assets. As they have dumped South African government bonds, prices have dropped and yield rates have increased.
This had an effect on all local investors, who also tried to collect some cash by selling off their bonds.
According to Johnson, the lack of buyers meant that the Reserve Bank began buying bonds to keep the market functional. “The buyer had acted as a buyer of last resort and only this desperate action prevented an effective default.”
Yield rates on the 10-year government bond shot up to 12.38% on March 24 – some of the highest levels yet.
“Remember that the Treasury needs to sell R1.1 billion worth of bonds every single day. But at these rates the interest bill on South Africa’s debt would rise by over a quarter, which would also push the country in the direction of default,” said Johnson.
However, Andrew Davison, head of advice at Old Mutual Corporate Consultants, said South Africa had passed its first market test after the Moody’s announcement with flying colours. He referred to Bloomberg data which indicated that Tuesday’s bond issue of R4.53 billion attracted record demand.
By Friday, the yield rate on the 10-year bond had improved to 11.2%.
Nolan Wapenaar, a fund manager at Anchor Capital, said the Reserve Bank’s actions in no way showed any desperation. It was to ensure the market continued to function.
He explained that for two weeks in March, foreigners bought R56 billion in South African bonds, which meant that market creators (third parties who are responsible for ongoing, reasonable price quotations at which they are prepared to buy and sell) were overrun by investors who wanted to sell bonds, but there was a low demand.
This skewed prices and the Reserve Bank had to intervene in order to normalise matters.
According to Wapenaar the strategy worked, because there was supply and demand again, as well as price transparency.
The current yield rate reflected the context of what was happening around us, he said.
He said Wednesday’s auction of government bonds was one of the best in a very long time, which showed that the market was functioning well.
According to Davison, the credit downgrade to full junk status could even have the effect of making South African government bonds more attractive, because not all investors were limited to investing in bonds that were sub-investment grade.
Adrian Saville of Cannon Asset Managers said in a note that, because South Africa’s government bonds would only fall out of the World Government Bond Index in April, and may thereafter no longer be held by institutional investors such as foreign pension funds, the full impact would only be seen in May.
Davison said the yield rate on South African government bonds that investors were now insisting on already reflected South Africa’s lower credit rating.
That was clear if our yield rate on bonds was compared to countries that had already lost their investment status.
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