Thu, Nov 23, 2017 page10

• South Africa facing double jeopardy over ratings

  • Bloomberg
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  South Africa will confront the threat of a US$7 billion debt selloff this week as it awaits two concurrent judgements on its credit status.

  Opinion among economists is divided as to how stark a danger that is. Fifty-six percent of respondents in a Bloomberg survey said S&P Global Ratings will reduce its assessment on rand-denominated debt to the highest non-investment grade tomorrow.

  Moody’s Investors Service, which is scheduled to make a decision, is likely leave it unchanged, according to three-quarters of those asked.

  Should both companies cut, rand debt would fall out of gauges, including Citigroup Inc’s World Government Bond Index, sparking outflows of 80 billion to 100 billion rand, Citigroup economist Gina Schoeman said.

  This would raise borrowing costs for the nation that is selling more debt to plug a widening budget gap.

  Conflict in the ruling African National Congress (ANC) in the run-up to its leadership election next month has hamstrung efforts to bolster the Africa’s most-industrialized economy, which had its second recession in less than a decade earlier this year.

  Business confidence is near the lowest in more than three decades amid allegations of corruption against state companies’ managers and politicians including South African President Jacob Zuma.

  “Given the fraught political context in which South Africa finds itself, alongside the negative repercussions of downgrades in triggering ejection from key bond indices, we believe that the rating agencies will not rush to cement decisions to downgrade this month,” said Phoenix Kalen, director for emerging-markets strategy at Societe Generale SA in London.

  The sustainability of the nation’s debt will be at risk unless government presents a credible fiscal-consolidation plan next year, Moody’s said last month after the mid-term budget.

  While the outcome of the ANC’s elective conference next month will be of interest to ratings companies, it is the February budget that they will be watching for clues on the country’s debt direction, Investec Bank Ltd chief economist Annabel Bishop said.

  “The budget will provide the fiscal detail that was lacking in the 2017 medium-term budget policy statement, which is needed in assessing South Africa’s creditworthiness,” she said. “The likelihood has increased for South Africa to lose its remaining investment-grade ratings.”

  Investors are pricing in a downgrade of South Africa’s debt, with yields on dollar securities surpassing those of lower-rated countries such as Brazil and Russia.

  South Africa’s US currency bonds due in September 2027 yield 5.08 percent.

  Still, investors’ search for higher yields could help counter some of the expected outflows, Schoeman said.

  S&P and Fitch Ratings Ltd both rate South Africa’s foreign-currency debt at the highest non-investment grade. They lowered their assessments within a week of Zuma’s March 31 replacement of then-South African minister of finance Pravin Gordhan with Malusi Gigaba.

  Moody’s, which has South Africa’s foreign-currency rating at the lowest investment grade, is not going to lower its assessment, 10 of 16 respondents in the Bloomberg survey said.
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