{"id":144225,"date":"2016-11-24T09:14:35","date_gmt":"2016-11-24T07:14:35","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=144225"},"modified":"2016-11-24T09:14:35","modified_gmt":"2016-11-24T07:14:35","slug":"sa-junk-status-can-be-avoided","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/finance\/144225\/sa-junk-status-can-be-avoided\/","title":{"rendered":"SA junk status can be avoided"},"content":{"rendered":"

With one rating announcement taking place this week and another on 2 December \u2013 South Africa is looking for positivity based on facts, says Renier de Bruyn at Sanlam Private Wealth.<\/em><\/p>\n

Earlier this year, most economists agreed that a fall to \u2018junk\u2019 status seemed inevitable. However, there is now increasing optimism that we may yet be able to dodge the downgrade bullet.<\/p>\n

The impact of \u2018junk\u2019 status<\/strong><\/p>\n

As we\u2019ve said before, it\u2019s hard to find any positive outcomes for our economy in the event of a downgrade. But looking at our financial markets, it may not have much impact, provided that it was expected and accounted for in asset prices.<\/p>\n

If one looks at how the markets of countries that have lost their investment grade rating in recent years performed before and after becoming \u2018junk\u2019, it\u2019s clear that in general, the currency, equity prices, budget and current account deficits deteriorated in the run-up to being downgraded, but then stabilised and often improved after the event.<\/p>\n

The muted reaction of the markets after the downgrades was a result of asset prices having moved ahead of the event.<\/p>\n

\"saratings\"<\/a><\/p>\n

The most direct impact of a lower credit rating would be seen in the cost of South Africa\u2019s foreign-denominated debt. The chart below shows a comparison of the cost to insure certain governments\u2019 foreign currency debt against default.<\/p>\n

It\u2019s noteworthy that South Africa is already priced in line with other countries that are rated \u2018junk\u2019 by one or more rating agencies.<\/p>\n

\"saratings2\"<\/a><\/p>\n

It\u2019s also important to distinguish between the credit ratings of local versus foreign currency debt. Our government\u2019s rand-denominated debt is rated higher than its foreign currency debt and therefore has a lower chance of losing its investment-grade status.<\/p>\n

The rand debt rating is also more relevant, as only 10% of government debt is denominated in foreign currency.<\/p>\n

Downgrade not a certainty<\/strong><\/p>\n

Although turmoil and uncertainty on the political front may yet prove to be the final decider for the rating agencies, many industry players and observers now believe the feared downgrade at the end of the year is not yet a done deal. Remember, it is about judging South Africa\u2019s creditworthiness.<\/p>\n

The stabilisation of commodity prices during 2016 has led to increased optimism, as has the expectation that we may now be nearing the end of the drought. The recovery of the rand has also played a significant role in the outlook for inflation and interest rates. On balance, these events have all contributed to marginally better growth prospects and an improved ability to service debt.<\/p>\n

We\u2019ve had peaceful municipal elections with a shift in power towards the opposition, and recent \u2018victories\u2019 for the offices of the Public Protector and our Finance Minister have confirmed the strength of some of our institutions. Furthermore, initiatives towards better cooperation between government, labour and business to avert a downgrade have certainly counted in our favour.<\/p>\n

From people talking around the braai to media reports, there\u2019s much speculation that the rating decision will hinge on political events, such as the student protests or whether President Jacob Zuma stays or goes.<\/p>\n

However, the rating agencies predominantly base their decisions on the numbers, with particular emphasis on South Africa\u2019s longer term economic growth outlook, and whether they\u2019re confident that our government will manage the country\u2019s finances prudently. The credibility of our Finance Minister and his Treasury plays a crucial role.<\/p>\n

Rating agencies have been sympathetic towards South Africa\u2019s current lack of economic growth, influenced by weak external demand, which has had an impact on exports, as well as the drought, which they see as temporary.<\/p>\n

The expectation is that economic growth will start recovering into 2017 as these headwinds dissipate.<\/p>\n

Other positives include the more reliable electricity supply, which had previously hampered growth, as well as an improved outlook for inflation following the recovery of the rand, and prospects for lower food prices, which may open the door for interest rate cuts next year.<\/p>\n

The major rating agencies still assess South Africa\u2019s institutional strength as high, and it is in this arena where political instability has the potential of accelerating a downgrade decision.<\/p>\n

If we can avert this, then the next step to retaining our investment-grade rating is to prove that we can reignite longer term economic growth by introducing the necessary structural economic reforms that will make South Africa a more business-friendly environment.<\/p>\n

The imminent threat of a downgrade has provided the impetus for better cooperation between government, business and labour, but it remains to be seen whether policymakers will eventually push through the necessary reforms in the future given the various vested interests and social demands.<\/p>\n

A last note on asset allocation<\/strong><\/p>\n

Despite the threat of a downgrade, we increased exposure to banks in many of our client portfolios as well as to government bonds in our asset allocation portfolios earlier this year. Our reasoning was based on valuation and our view that the market had already priced in the downgrade at the time \u2013 almost a case of \u2018heads I win, tails we draw\u2019.<\/p>\n

Both of these investments have performed well since, but the good performance wasn\u2019t so much driven by investors\u2019 view on whether we would be able to avert a downgrade as was it by the improved investor sentiment towards South Africa\u2019s emerging market peer group, driven by a recovery in commodity prices and the delay in interest rate hikes by the US Federal Reserve.<\/p>\n

South Africa\u2019s dollar-denominated debt is still trading in line with the likes of Russia, Turkey and Brazil, which are already rated non-investment grade by S&P. The market doesn\u2019t seem to distinguish us from the others simply because of our current better credit rating.<\/p>\n

By Renier de Bruyn<\/strong><\/em><\/p>\n

Read the full article on Sanlam Private Wealth’s website, here<\/a><\/strong><\/p>\n

Read: South African credit rating under each president: 1994 \u2013 2016<\/a><\/strong><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

With one downgrade announcement taking place this week and another on 2 December \u2013 South Africa is looking for positivity based on facts, says Renier de Bruyn at Sanlam Private Wealth.<\/p>\n","protected":false},"author":10,"featured_media":118672,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11121],"tags":[26],"class_list":["post-144225","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-headline"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/144225","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=144225"}],"version-history":[{"count":4,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/144225\/revisions"}],"predecessor-version":[{"id":144315,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/144225\/revisions\/144315"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media\/118672"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=144225"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=144225"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=144225"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}