Investors were cautious ahead of Standard & Poor’s (S&P) Global Ratings review on South Africa’s debt, with concern that it may pull the trigger on a downgrade to to junk status.
The country has already survived the two reviews from Moody’s and Fitch, however with a rating only one level above junk, S&P has the worst opinion of the country’s credit rating out of the three firms.
Last Friday Fitch Ratings changed the outlook on its BBB- rating, which is one level above junk, to negative from stable, while Moody’s Investors Service rated the country’s debt at the second-lowest investment grade level, with a negative outlook.
Bloomberg reported that only six of 20 countries reduced below investment grade by S&P over the last three decades have regained it, and that took from 13 months to more than 11 years.
Seven of 12 economists surveyed by Bloomberg last month said the nation’s foreign-currency rating will be downgraded to junk on Friday, while three foresee it happening in June.
“If South Africa does get a downgrade, I think we are looking at at least three to five years before it could possibly get upgraded again,” Per Hammarlund, chief emerging-market strategist at SEB SA in Stockholm, told Bloomberg.
“Given the way politics are moving now, it seems as if the political paralysis will continue and that doesn’t bode well for economic reforms.”
“We think S&P will look to downgrade the country’s local-currency rating on Friday from the current BBB+,” Jeffrey Schultz, a senior economist at BNP Paribas Securities in Johannesburg, said to the news agency.
“Such a move, we believe, would serve as a warning signal that S&P is uncomfortable with the direction in which South Africa’s debt-to-GDP ratio is moving and that should structural economic reforms not materialize to boost growth before June next year, a foreign-currency downgrade is inevitable.”
Chris Gilmour, Investment Analyst at Absa Wealth & Investment Management, underlined the effect of a ratings downgrade on ordinary South Africans earlier in the year.
“If we were to be relegated to junk status, it just means South Africa is going to have to pay more, to raise the money it needs for economic growth, key projects and service delivery,” Gilmour said.
“Like individuals approach a bank for a home loan to buy a house, governments source financing from international financial markets to fund key projects like new roads and power plants,” he said.
The ratings agencies evaluate a country based on a range of variables that gauge stability and predictability, such as economic performance, unemployment rates and inflation. If two of the three ratings agencies put us into junk status, how might it affect your own pocket?
According to Absa, interest rates are likely rise, thus increasing the monthly cost on things like homeloan and vehicle finance repayments. We may also find that the rand loses further ground against international currencies, which would increase the price that we pay to import foreign good into South Africa, Gilmour said.
How would South Africa fix this? The credit agencies would need to see that South Africa has a robust plan in place, that yields tangible results. “We would have to convince the rating agencies that we can display that we’re not going to allow wasteful expenditure to take place on a big scale,” Gilmour said.
“If we were downgraded to junk status, we could conceivably – over time – be paying 2-3% more to service this debt,” the analyst said.
Absa provided a few scenarios that illustrate what a rise in interest rates might cost you: