IT APPEARS to be just a matter of time before South Africa’s credit rating is cut to junk.
S&P Global Ratings will lower the nation’s rating to non-investment grade by the end of this year, according to 12 of 13 economists and analysts surveyed by Bloomberg. Four see the downgrade to BB+, which will put SA on par with Turkey and Indonesia, coming as early as next month. All 13 analysts predict Moody’s Investors Service, which rates the nation one level above S&P, will cut its assessment by December.
"The concern is that we continue to have disappointing growth that ultimately adds to fiscal pressures," Macquarie Group economist Elna Moolman said on Wednesday. "As things stand now, I think they will downgrade us."
Both the National Treasury and South African Reserve Bank forecast the economy will expand less than 1% this year, the slowest pace since 2009, as depressed commodity prices and low demand from major export markets weigh on output. Lacklustre growth will limit tax revenue and make it more difficult for the Treasury to meet its target of reducing the budget deficit to 2.4% of gross domestic product (GDP) in the year to end-March 2019, from 3.9% last year, and limit gross debt to about 50% of GDP.
Political upheaval, which has led to calls for President Jacob Zuma to resign, is compounding the economic risks. In December, Mr Zuma replaced then finance minister Nhlanhla Nene with a little-known legislator, sending the rand and bonds plunging. In March, the Constitutional Court found the president violated the Constitution when he refused to abide by a directive from the public protector and last week the High Court in Pretoria ruled prosecutors erred when they dropped corruption charges against Mr Zuma shortly before he became president in 2009.
The rand was at R14.9317 to the dollar and yields on rand-denominated government bonds due in December 2026 rose six basis points to 9.19% at 5.34pm on Wednesday. But the rand had strengthened to R14.8690 by 9.23am on Thursday morning.
Investors already consider SA more risky than some junk-rated countries. The cost of insuring against a default by the government for five years using credit-default swaps is 38 basis points higher than for Russia, which is rated speculative grade by both S&P and Moody’s, according to data compiled by Bloomberg. The only major emerging market with contracts more expensive than SA is Brazil, which is in the worst recession in a century and where President Dilma Rousseff is facing impeachment.
Moody’s put SA’s credit rating on review for a downgrade in March because of a weaker growth and fiscal outlook. There was a "real possibility" that the nation’s debt assessment would be cut, S&P MD for sub-Saharan Africa Konrad Reuss said in April.
The Reserve Bank said on Tuesday that there was a medium to high probability that SA’s debt would be downgraded to noninvestment grade. That could lead to capital outflows, increase the cost of funding and cause spreads on credit-default swaps to widen, the bank said.
The government must work with business and labour to avert a downgrade, said Finance Minister Pravin Gordhan.
"We remain confident that our fiscal targets for the period ahead will be met, yet it is clear that bold steps need to be taken to address structural barriers to faster growth," Mr Gordhan said on Wednesday.
Political infighting will stymie efforts to implement reforms, such as changes to labour laws, that are needed to spur growth, according to Per Hammarlund, chief emerging-market strategist at SEB SA in Stockholm.
"With growth slowing to a crawl of 0.5% this year and only slightly faster next year, debt will continue to rise, closing in on 60% of GDP," Mr Hammarlund said. "The ratings agencies simply cannot overlook the government’s inability to address the problem."
Bloomberg
S&P Global Ratings will lower the nation’s rating to non-investment grade by the end of this year, according to 12 of 13 economists and analysts surveyed by Bloomberg. Four see the downgrade to BB+, which will put SA on par with Turkey and Indonesia, coming as early as next month. All 13 analysts predict Moody’s Investors Service, which rates the nation one level above S&P, will cut its assessment by December.
"The concern is that we continue to have disappointing growth that ultimately adds to fiscal pressures," Macquarie Group economist Elna Moolman said on Wednesday. "As things stand now, I think they will downgrade us."
Both the National Treasury and South African Reserve Bank forecast the economy will expand less than 1% this year, the slowest pace since 2009, as depressed commodity prices and low demand from major export markets weigh on output. Lacklustre growth will limit tax revenue and make it more difficult for the Treasury to meet its target of reducing the budget deficit to 2.4% of gross domestic product (GDP) in the year to end-March 2019, from 3.9% last year, and limit gross debt to about 50% of GDP.
Political upheaval, which has led to calls for President Jacob Zuma to resign, is compounding the economic risks. In December, Mr Zuma replaced then finance minister Nhlanhla Nene with a little-known legislator, sending the rand and bonds plunging. In March, the Constitutional Court found the president violated the Constitution when he refused to abide by a directive from the public protector and last week the High Court in Pretoria ruled prosecutors erred when they dropped corruption charges against Mr Zuma shortly before he became president in 2009.
The rand was at R14.9317 to the dollar and yields on rand-denominated government bonds due in December 2026 rose six basis points to 9.19% at 5.34pm on Wednesday. But the rand had strengthened to R14.8690 by 9.23am on Thursday morning.
Investors already consider SA more risky than some junk-rated countries. The cost of insuring against a default by the government for five years using credit-default swaps is 38 basis points higher than for Russia, which is rated speculative grade by both S&P and Moody’s, according to data compiled by Bloomberg. The only major emerging market with contracts more expensive than SA is Brazil, which is in the worst recession in a century and where President Dilma Rousseff is facing impeachment.
Moody’s put SA’s credit rating on review for a downgrade in March because of a weaker growth and fiscal outlook. There was a "real possibility" that the nation’s debt assessment would be cut, S&P MD for sub-Saharan Africa Konrad Reuss said in April.
The Reserve Bank said on Tuesday that there was a medium to high probability that SA’s debt would be downgraded to noninvestment grade. That could lead to capital outflows, increase the cost of funding and cause spreads on credit-default swaps to widen, the bank said.
The government must work with business and labour to avert a downgrade, said Finance Minister Pravin Gordhan.
"We remain confident that our fiscal targets for the period ahead will be met, yet it is clear that bold steps need to be taken to address structural barriers to faster growth," Mr Gordhan said on Wednesday.
Political infighting will stymie efforts to implement reforms, such as changes to labour laws, that are needed to spur growth, according to Per Hammarlund, chief emerging-market strategist at SEB SA in Stockholm.
"With growth slowing to a crawl of 0.5% this year and only slightly faster next year, debt will continue to rise, closing in on 60% of GDP," Mr Hammarlund said. "The ratings agencies simply cannot overlook the government’s inability to address the problem."
Bloomberg
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