Advice for investors ahead of ratings downgrade

Francois van der Merwe, head of offshore investments at Novare.
Francois van der Merwe, head of offshore investments at Novare.

Cape Town - Investors should “stick with their investment horizons and not be overly influenced by short-term noise” as the rest of 2016 will continue to be difficult for local and international economies, Novare explained in its first quarter market overview on Wednesday.

“There is a real risk that Standard & Poor’s will cut the country’s investment grade rating to junk as soon as its June meeting,” Francois van der Merwe, head of offshore investments at Novare, said in a statement.

“This is already partially reflected in the local bond market, but many passive foreign investments will only leave the country once it falls out of the Citigroup World Government Bond Index.

“If the country loses its investment grade rating, funding the current account deficit will also become increasingly difficult, leaving the country even more exposed to large external vulnerabilities that will keep the currency under pressure.”

This comes as Finance Minister Pravin Gordhan told Parliament on Wednesday that Treasury remains “confident that our fiscal targets for the period ahead will be met”.

In addition, Deputy Minister Mcebisi Jonas told Parliament on Wednesday that “the current economic climate is arguably the most challenging since 1994. We need to rapidly stimulate growth.”

Van der Merwe said the economic woes “were not helped by the country’s well-publicised political shenanigans”.

“The clear rift between (Gordhan) and other parts of government’s leadership, and accusations of state capture, along with the Constitutional Court’s ruling that President (Jacob) Zuma flouted the country’s constitution harmed both investor sentiment and the country’s image.”

Democratic Alliance MP David Maynier told Parliament on Wednesday that Zuma is not leading a national effort to avoid a ratings downgrade, as he promised to do in his State of the Nation address earlier in 2016.

“Government is not focused on a national effort to avoid a ratings downgrade,” he warned. “Government is not coordinating a national effort to avoid a ratings downgrade.”

“There is a perception that a ratings downgrade does not matter: the International Monetary Fund, the World Bank and ratings agencies, we are told, are imperialist institutions, and besides we’ve apparently got China waiting in the wings to bailout South Africa.”

“All this makes it almost impossible for the minister (Gordhan) to bring together an effective ‘coalition for change’,” he said.

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