SA’s credit rating is in jeopardy

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South Africa’s sovereign credit rating will probably be cut to junk status this year, at least by Standard & Poor’s, amid concerns the government could fail to reach its budget targets, a Reuters poll found on Wednesday.

All but one of the 16 economists surveyed by Reuters this week expect South Africa to lose its investment grade status this year, further hitting markets that have already reacted to expectations of a downgrade.

“A downgrade has been somewhat priced in. Government bond yields are in line with junk status already,” said Rajiev Rajkumar, analyst at 4CAST in London.

“Nevertheless, a downgrade would trigger some forced selling by institutional investors as many have a mandate to only hold investment grade bonds.”

Ten economists said a cut to junk, which would put it on a par with peer Brazil, would be negative for markets and six said it would be very negative. None thought it would be positive.

Economists accurately predicted Brazil’s downgrades in two similar Reuters polls last year.

The majority of analysts agreed Standard & Poor’s, which like fellow agency Fitch Ratings currently rates South Africa just one notch above junk, was most likely to cut. Moody’s Investors Service has it two notches above junk but on review for a downgrade.

Finance minister Pravin Gordhan has pledged to narrow the budget deficit to 2.4 percent of GDP by 2018/19.

It is political concerns and policy uncertainty constraining growth, which in turn is putting budget targets under threat, Carmen Nel, economist at Rand Merchant Bank said.

South African growth has slowed due to lower prices for its commodity exports and power-generating constraints. The economy is expected to grow 0.7 percent this year.

Economists said a credit rating downgrade would hurt the poor who depend on social welfare the most with about a quarter of the labour force out of work.

 “A downgrade to junk will increase the country’s interest burden on servicing debt, taking money away from where it is needed – the social and welfare dependency scheme,” said Colen Garrow, economist at Lefika Securities.

However, emerging market risk sentiment has improved, taking the rand with it.

A Reuters poll of global foreign exchange strategists conducted earlier this month showed while volatility will remain high currencies aren’t likely to sink to new lows, mainly because expectations for US interest rate hikes have been scaled back.

Still, Rand Merchant Bank’s Nel added there would likely be renewed downward pressure on the rand and asset prices leading up to or around the event, particularly given the recent appreciation in asset prices that has partly priced out some of the ratings-related risk.

REUTERS

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