South Africa’s credit is down, but not out

With South Africa's official credit status being downgraded to junk, it’s a tough climb back to safety; but it's a climb that needs to happen.


Our foreign and local currency have been downgraded to BB and BB+ respectively, the country will now need to work even harder to yield the same amount of wealth we had a few years ago.

“The downgrade reflects our opinion of further deterioration of South Africa’s economic outlook and its public finances. In our view, economic decisions in recent years have largely focused on the distribution rather than the growth of national income,” mentions S&P Global in a statement.

“Consequently, South Africa’s economy has stagnated and external competitiveness has eroded. We expect that offsetting fiscal measures will be proposed in the forthcoming 2018 budget in February next year, but these may be insufficient to stabilise public finances in the near term, contrary to our previous expectations.”

Moody’s Investors Service is the only credit rating agency that took a softer stance and is still assigning an investment grade rating to both the country’s foreign and local currency debt. However, despite this slight reprieve, it has placed the government’s unsecured bonds rating on review for a possible downgrade.

Read more: Learn from the past in the face of recent downgrades

With 60 to 90 days to make a move, the review period covers both the ANC National Conference and the February 2018 Budget Speech. Bravura’s head of business development, Ian Matthews, says who the next leader of the ANC is will affect the economy.

“There are reports that Deputy President Cyril Ramaphosa, investor’s favoured candidate, is leading the race to take over as ANC leader from President Jacob Zuma. Most economists believe that a clear win for Ramaphosa would be ‘hugely market-positive’ while a victory for Zuma’s ex-wife Nkosazana Dlamini-Zuma, the other main contender, could place further pressure on the currency.”

“The decision to place the rating on review for downgrade was prompted by a series of recent developments that suggest that South Africa’s economic and fiscal challenges are more pronounced than [we] had previously assumed,” mentions Moody’s. “Growth prospects are weaker and material budgetary revenue shortfalls have emerged alongside increased spending pressures. Altogether, these promise a faster and larger rise in government debt-to-GDP than previously expected.”

Matthews also said that if both S&P and Moody’s downgraded our local currency debt to junk, South Africa’s bonds would fall out of the Citigroup’s World Government Bond Index, which would cause tracker funds to sell out their holdings of those bonds.

“Ejection from the crucial bond indexes means passive investors mandated to invest in local bonds would automatically have to withdraw from those investments. Downgrades to sub-investment grade could trigger forced selling of up to $14 billion of outflows, according to the Bank of America. If S&P and Moody’s, therefore, both downgrade South Africa, then far greater losses on the rand can be expected. The rand could depreciate rapidly, causing inflation to increase, putting upward pressure on interest rates and downward pressure on economic growth,” explains Matthews.

The effect can already be seen as many foreign investors are already turning away from South African bonds according to data from the Johannesburg Stock Exchange; daily outflows for the month have averaged R134 million.

With all the worries a junk status downgrade has brought, there is a sliver of hope. Both Moody’s and S&P have noted that they’ll take into account any positive developments. S&P notes that South Africa’s credit metrics would remain broadly unchanged in the coming year.

“It also speaks to our view that political instability could abate following the party congress of the governing ANC in December 2017, helping the government to focus on designing and implementing measures to improve economic growth and stabilise public finances,” mentions the agency.

S&P could raise the rating in light of strengthening fiscal outcomes. “Upside rating pressure could also rise if the risks of a marked deterioration in external funding sources were to subside, in our view, and external imbalances decline. Upward pressure on the rating could also push on policymakers to introduce economic reforms to benefit job creation, competitiveness, and economic growth.”

Matthews feels that South Africa remains at a crossroads and that only through a concerted effort by government and business could the country make it out of this predicament. “To a very large extent, the private sector holds the key, but the government holds the door.”