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Mei 2016
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The effects of a possible
downgrade on South Africa
A
lot has recently been said in the
media regarding the possibility of
whether South Africa will be down-
graded to ‘junk status’ by the re-
spective rating agencies, namely Moody’s,
Standard and Poor’s and Fitch.
Emphasis has been placed on the implica-
tions for our stumbling economy, the gov-
ernment, corporates, consumers and what
the government is required to do in order
to avoid a possible downgrade. This article
will focus on understanding what a sover-
eign credit rating is and what ‘junk status’
means for South Africa and its citizens.
What is a sovereign credit
rating?
A sovereign credit rating expresses the risk
that a country will be unable to meet its fi-
nancial commitments, in terms of repaying
interest payments and the debt principal on
a timely basis.
Essentially, a sovereign credit rating is
aimed at providing a relative ranking of a
country’s overall credit worthiness. More-
over, the respective rating agencies men-
tioned above utilise various measures that
allow them to gauge a country’s social,
economic and political position in order to
determine the probability of a country de-
faulting on its repayments.
Table 1
below
depicts the sovereign credit ratings by the
respective rating agencies.
As it stands, Moody’s has rated South
Africa as a Baa2 rating which is two notches
above sub-investment grade (‘junk status’),
while Standard and Poor’s and Fitch have
rated South Africa as BBB-, which is one
notch above ‘junk status’.
An important but unappreciated distinc-
tion between the sovereign credit ratings is
the rating between the foreign currency de-
nominated debt and the local currency de-
nominated debt.
Distinguishing between
our local currency debt
rating and foreign
currency debt rating
Foreign currency denominated debt is char-
acterised as debt that is issued in a currency
other than the sovereign’s own currency (i.e.
South African issued government bonds in
US$, yen or euros), while local currency debt
is debt that is issued in local currency (i.e.
ZAR).
Table 2
displays South Africa’s local
currency and foreign currency debt ratings
by the respective rating agencies. Further-
more, it is important to note that it is South
Africa’s foreign currency denominated debt
rating that is in the firing line in terms of a
possible downgrade to ‘junk status’.
As seen in Table 2, Moody’s has one rat-
ing which applies to both the local cur-
rency and foreign currency denominated
debt, while Standard and Poor’s and Fitch
distinguishes between South Africa’s for-
eign currency and local currency debt
ratings.
Moody’s rating for South Africa is two
notches above ‘junk status’, and the Stand-
ard and Poor’s rating for South Africa’s
foreign currency is one notch above ‘junk
status’, while its rating for South Africa’s
local currency is three notches above ‘junk
status’. Fitch’s rating for South Africa’s
foreign currency is two notches above ‘junk
status’, while its rating for South Africa’s
local currency is three notches above
‘junk status’.
FOCUS
Money matters and financial services
Special
SHAWN PHILLIPS,
research analyst: Glacier by Sanlam
SOVEREIGN CREDIT RATING
MOODY’S
STANDARD AND POOR’S FITCH
CREDIT RATING MEANING
Aaa
AAA
AAA
Highest quality
Investment grade
Aa1
AA+
AA+
High quality
Investment grade
Aa2
AA
AA
Aa3
AA-
AA-
A1
A+
A+
Strong payment capacity Investment grade
A2
A
A
A3
A-
A-
Baa1
BBB+
BBB+
Adequate payment
capacity
Investment grade
Baa2
BBB
BBB
Baa3
BBB-
BBB-
Ba1
BB+
BB+
Likely to fulfil obligations,
ongoing uncertainty
Sub-investment grade
Ba2
BB
BB
Ba3
BB-
BB-
B1
B+
B+
High risk obligations
Sub-investment grade
B2
B
B
B3
B-
B-
TABLE 1: SOVEREIGN CREDIT RATING.
Source: Barclays Emerging Market Research
Junk status