Pace of S&P downgrade the big surprise

Cape Town - The big surprise of Monday night's downgrade of SA's foreign currency debt by S&P was not that it happened, but the pace at which the ratings agency had sped up its decision, according to Nilan Morar, head of trading at Purple Group.

S&P essentially downgraded SA's sovereign credit rating to junk status.   

In Morar's view, S&P's decision is obviously in response to the recent Cabinet reshuffle by President Jacob Zuma as the ratings agency was initially meant to report on this only on June 2.

"So, effectively they downgraded SA’s long-term foreign currency sovereign credit rating," said Morar.

He added that there is an important distinction to be made.

"Of our total outstanding government debt, only about 10% is issued in foreign currency, while the rest (90%) is issued in domestic currency and this carries an investment grade rating. Of the 90% that is issued in domestic currency, about 35% is held by foreigners," explained Morar.

"Ratings play a critical role when it comes to the maturing and subsequent requirement to roll this debt over - that is to extend the maturity of this debt - as it simply just gets more expensive. As with any investment, investors require a higher return for higher perceived risk."

READ: LIVE: ‘New’ Treasury wants to rely less on foreign debt after junk status shock

Tumisho Grater, economic strategist at Novare, said, since S&P was only scheduled to announce its credit review in June, its latest move comes ahead of both Fitch (which could still move at any time) and Moody’s which is scheduled to give its verdict on Friday - although Moody’s still rates SA two notches above junk status.

"S&P’s rating comes on the back of President Jacob Zuma’s Cabinet reshuffle that saw the removal of former finance minister Pravin Gordhan, who was seen as a symbol of stability and who instilled confidence in the investment community," said Grater.

She pointed out that S&P expressed concern regarding SA’s fiscal policy.

"The removal of a finance minister in this manner may be viewed as a deterioration of South African structures and questions the institution’s ability to stay on the course of fiscal consolidation while delivering on the reform agenda," said Grater.

"Should momentum be slowed or lost in other programmes such as procurements or state-owned entities' governance reforms, some of the contingent liabilities may impact the balance sheet of the sovereign."

She regards the downgrade as another unfortunate blow to the country.

"It comes at a time when we are in need of tackling the uncomfortably high unemployment rate, which can only be done through the creation of jobs. Jobs can only be created in an economy that is thriving and attracting investment and this move may be a deterrent," she said.

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