Further downgrades expected - economists

Johannesburg – Standard & Poor’s (S&P) negative outlook on South Africa’s credit rating may signal that further downgrades are possible, say economists.

On Friday the ratings agency affirmed the foreign currency rating at BB+, the local currency rating remained at investment grade at BBB-, with a negative outlook.  

Since Friday, the rand has strengthened from R12.78/$ to as low at R12.69/$, said Annabel Bishop, chief economist at Investec.

READ: S&P keeps rating at BB+

Last week ratings agency Fitch also affirmed the credit rating at BB+, and the local currency remained at investment grade at BBB-. Fitch listed low growth, deteriorating governance at state-owned companies (SOCs) and contingent liabilities among concerns. Fitch is also of the view that infighting within the ANC will remain strong for the remainder of the year. The ratings agency added that even after the elective conference, policy may be influenced by “competing factions” within the ANC.

Fitch's outlook remained stable. This means no further ratings action is being considered, explained Bishop.

ALSO READ: Rand dips below R13/$ as Fitch affirms SA rating outlook as stable

This contrasts with S&P’s negative outlook. “S&P maintained its negative outlook, signalling the next move will likely be a downgrade,” said Bishop. She explained that the local currency could possibly be downgraded to junk or BB+ if the outlook does not change.

If the local currency is downgraded to junk, South Africa would fall out of the Citibank World Government Bonds Index (WGBI).

This would be negative for South Africa, economic strategist at Argon Asset Management Thabi Leoka told Fin24 on Friday. “We would lose out on investment from investors who are only allowed to invest in investment grade countries,” she explained.

This would also result in an outflow between R80bn to R130bn, said Bishop. “Which would cause the local currency to depreciate markedly to our down case,” she added. “South African bonds would then fall into the WGBI’s additional market’s index.”

Political risk

S&P acknowledged that the flexible monetary policy is a strength for the long-term debt rating, however political risks will persist with the run-up to the ANC elective conference later this year. This could impact negatively on the economy’s performance.

“The negative outlook on the foreign and local currency ratings reflects our view that political risks will remain elevated this year, which could undermine economic growth and fiscal outcomes more than we currently project,” the agency stated.

The ratings agency explained that political risks would distract from economic growth priorities which would weigh down fiscal consolidation and impact investor confidence.

S&P pointed out that ratings would be lowered in light of poorer fiscal and macro-economic performance. However S&P would revise the outlook to stable if political risks are reduced, and if economic growth and fiscal outcomes strengthen.

“Such an outcome would avoid the credit rating downgrade that this agency is currently signalling will occur,” said Bishop.

Breathing room

Old Mutual Investment Group chief economist Rian le Roux said that S&P’s decision to keep the local currency rating at investment grade was a “relief” and offered room for the country to stabilise its rating. However, Le Roux said that the country is at risk of a “full-scale ratings meltdown” with a possibility of multiple downgrades by all agencies.

“Merely trying to avoid another downgrade over the coming months is not enough,” said Le Roux. He explained that the most immediate focus would have to have the negative outlook changed to stable.

He added that government should focus on rebuilding investor confidence, this requires more policy certainty and predictability. “Considerable uncertainties currently exist as to the practical policy implications of government’s Radical Economic Transformation agenda. Clarity is required urgently in order to stabilise confidence."

Moody’s which has the country on review for a downgrade is yet to make an announcement. Le Roux is of the view that Moody’s will downgrade both the foreign and local currency rating by one notch, from Baa2 to BBB-, this will still be at investment grade.

In this case, South Africa will have some reprieve. “However, the reprieve will be short, as both agencies will revisit South Africa’s ratings within less than six months.”

S&P’s next review is scheduled for November 24. 


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