How long it could take SA to recover from junk status

South Africa’s sovereign credit rating is likely to be cut to junk status this year by at least one ratings agency: Standard & Poor’s.

This is according to a new Reuters poll, which found that 15 out 16 economists expect the country to lose its investment status in 2016.

South Africa is currently at risk of being downgraded to non-investment grade ratings levels – also known as junk status – by three major ratings agencies including Fitch and Standard & Poor’s.

In March Moody’s Investors Service placed South Africa’s Baa2 bond and issuer ratings on review for downgrade, which would put another agency with South Africa just above junk status.

South Africa is awaiting the outcome of ratings review programmes from both S&P and Fitch.

Junk – so what?

A junk rating has substantial implications for investment. Professional investors, such as hedge funds, pension funds and asset managers are prevented (by policy) from investing in junk countries.

Many analysts an economists say that a downgrade has already been priced into the market.

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

Director of Investments  at Sanlam Private Wealth, Alwyn van der Merwe, is of the opinion that a downgrade is most likely in June, adding that a downgrade could already largely be priced-in.

He said that the recent negative news flow out of the country has been reflective in the value of the rand, which hit record lows against the dollar in December 2015.

When BusinessTech questioned van der Merwe on how long it might take for South Africa to recover from junk status, he said that if global growth accelerates and responds to stimulus efforts by the central banks – South Africa should recover faster. He said that it could take only two years to get out of junk status should that happen.

“If economic and policy issues remain as they are – I can’t see it being for a short period,” he warned.

Sanlam Private Wealth CEO, Daniel Kriel said that finance minister Pravin Gordhan needs the political support from president Jacob Zuma. “That will determine how long this process of recovery will be,” he said.

The financial services group pointed out that South Africa defaulted on its debt in 1985 – coming out of that only in 1992.

More on South Africa

What a ratings downgrade means for the rand

What junk status means for South Africa

How to avoid a ratings downgrade in South Africa