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Money matters and financial services
Special
21
May 2016
In terms of the respective rating agencies,
Standard and Poor’s’ is of great concern as
South Africa’s foreign currency debt rating
is only one notch above ‘junk status’, while
it is two notches above ‘junk status’ for both
Fitch and Moody’s.
What does a downgrade
imply for South Africa and
its citizens?
The bottom line is that if South Africa were
to be downgraded to ‘junk status’ in terms
of its foreign currency debt, then it will cost
South Africa more to borrow money in
global markets. Currently, South Africa has
a budget deficit, implying that the govern-
ment spends more than it earns, whereby
the deficit is funded via loans from large
international bodies through issuances of
South African government bonds. Further-
more, South African consumers are highly
indebted and continue to finance their life-
styles through debt and the cost of servic-
ing this debt will become more expensive.
Generally, as seen in past sovereign down-
grades, the direct impact is usually felt in
the bond and fixed income market through
rising interest rates. A secondary shock will
generally be felt in the sovereign’s currency,
as it weakens against other major curren-
cies. This could also have a negative impact
on the equity market as investors deem the
sovereign’s assets to be more risky.
Is a downgrade likely?
Yes, a downgrade is likely across both the
local currency and foreign currency debt
rating, however in the case of Standard
and Poor’s, it will only be our foreign cur-
rency debt rating that will be considered
as sub-investment grade. For Moody’s if a
downgrade were to take place, then South
Africa’s local currency and foreign currency
debt rating will be one notch above ‘junk
status’, while if a downgrade were to take
place for Fitch our local currency debt rat-
ing will be two notches above ‘junk status’
and our foreign currency debt rating will be
one notch above ‘junk status’.
Moreover, it is important to note that institu-
tions that offer credit in a specific country
cannot have a higher sovereign credit rat-
ing than the sovereign itself, implying that
banks and corporates will be downgraded
along with its respective sovereign. For
a country like South Africa, what matters
is our local currency debt credit rating as
the bulk of our debt is domestically issued
(i.e. ZAR).
Is this the end of the road
for South Africa?
No, South Africa’s government bonds have
already priced in most of the bad news as-
sociated with a downgrade. However, it is
difficult to say what impact a knee-jerk reac-
tion by investors will have on the bond and
fixed income markets. Lower bond yields in-
ternationally imply that South African bonds
will still remain attractive for investors on a
relative basis.
We will only be at the ‘end of the road’ if
South Africa’s local currency debt ratings
were to become sub-investment grade (i.e.
‘junk status’) and then only will our bonds
be in jeopardy in terms of inclusion in the
respective global bond indices.
MOODY’S
STANDARD AND POOR’S
FITCH
LOCAL CURRENCY AND
FOREIGN CURRENCY
FOREIGN
CURRENCY
LOCAL
CURRENCY
FOREIGN
CURRENCY
LOCAL
CURRENCY
Ratings
Baa2
BBB-
BBB+
BBB
BBB+
TABLE 2: SOUTH AFRICA’S LOCAL AND FOREIGN CURRENCY DENOMINATED DEBT RATINGS.
Source: Barclays Emerging Market Research
The effects of a possible
downgrade