RealFin Capital Partners S&P Downgrades South Africa Earlier this evening, S&P Global ratings downgraded South Africa’s foreign credit rating to “Junk” status (BB+).
The Initial Impact
The turn of the century was an “event” that was by some accepted as an opportunity to usher in a period of rapid and unprecedented change. Titanic technological advances that would see us as human beings truly exceed our inventive behaviour, but it also brought along grave uncertainty.
USDZAR Exchange Rate
The rand has weakened to R 13.69 following the announcement:
Fast forward 17 years and for South Africa it has brought about the first Junk S&P credit rating since the turn of the century. The outlook is not looking positive for South Africa with Bloomberg citing; “S&P knocked the foreign-currency rating to BB+, the highest junk score, on Monday and warned that a deterioration of the nation’s fiscal and macroeconomic performance could lead to further reductions.”
Reasons Given * In our opinion, the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes. * We assess that contingent liabilities to the state are rising. * We are therefore lowering our long-term foreign currency sovereign credit rating on the Republic of South Africa to ‘BB+’ from ‘BBB-’ and the long-term local currency rating to ‘BBB-’ from ‘BBB’. * The negative outlook reflects our view that political risks will remain elevated this year, and that policy shifts are likely, which could undermine fiscal and economic growth outcomes more than we currently project.
Source: Bloomberg
FITCH
MOODY’S
S&P
BBB
Baa2
BBB
BBB-
Baa3
BBB-
JUNK STATUS BB+
Ba1
BB+
Source: Bloomberg
What Next for South Africa The ever-deepening factions in the ANC are getting deeper. The ANC’s Integrity Committee publicly voiced their disproval for the first time since the infamous Cabinet Reshuffle, too voicing their displeasure at not being consulted on what became an economic and political calamity. Whether President Zuma will jump before he is pushed, or whether he’ll sit through a motion of no confidence session to see whether his Teflon cape is still truly intact, the surmounting calls for him to step down are becoming deafening. With the S&P making the first move in the economic valuation of the recent events, it seems inevitable that Fitch and Moody’s will follow suit. Should South Africa recieve another downgrade, many bond holders including pension funds, hedge funds and foreign investors would be forced to sell their investment holdings as the additional credit downgrade would deem South African Credit non investment grade. Big outflows from bond sellers would place the Rand under pressure and the South African Economy, on a long, winding road, of uncertainty.