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Threat of downgrade looms over South Africa

Threat of downgrade looms over South Africa

The state of South Africa’s public finances and a government bailout of state-owned firm Eskom, could have cost the country its final investment grade rating from Moody’s on local currency debt. But economists say the economic fallout will not be dire for the country’s financial market.

South Africa breathed a sigh of relief on Friday as ratings agency Moody’s announced they were not publishing a scheduled review of the country’s debt rating.

Moody’s did not give a reason for the delay or indicate when its review of South Africa’s debt rating would be published.

The ratings agency is most likely biding its time for more clarity on South Africa’s upcoming election on May 8, said John Ashbourne, Senior Emerging Markets Economist at Capital Economics.

“The timing of it is always very unclear, but it is very likely there will be a downgrade in South Africa. Our view is that it won’t have a huge economic effect,” he said.

“If you look at what’s happened to other countries in Latin America and elsewhere that had their last investment grade taken away, you didn’t see a really sharp change in bond yield or performance that lasted.”

A possible downgrade would result in the country being excluded from the widely-tracked local currency World Government Bond Index, Fitch and S&P both reduced local currency debt to junk status in 2017, Capital Economic’s most recent Africa Economics Update states.

That said, exclusion from bond indices doesn’t usually have a big impact on local financial markets, William Jackson and James Swanston, the two economists at Capital Economics who wrote the report said.

“When South African sovereign foreign currency debt lost its second investment grade rating, that prevented some investors from holding these bonds, there was only a small and temporary sell-off in the country’s financial markets,” they said.

But for now South Africa retains its position in Citigroup Inc.’s World Government Bond Index.

Moody’s rating of South Africa’s foreign and local currency debt also remains on the lowest level of investment-grade at Baa3, with a stable outlook.

As fears of an immediate ratings downgrade eased, South Africa’s Rand fell against the dollar. At 1053 GMT on Monday, the rand traded at R14.23 per dollar, slipping 1.8% from its New York close on Friday.

The near collapse of energy giant Eskom, which provides 90% of South Africa’s electricity but is straddled with R419m ($29.7m) debt, has also led to shaky economic confidence, wary investors and growing fissures between government and an Eskom workforce fearful of privatisation.

Regional Impact

A potential demotion to junk status could still affect South Africa’s ability to raise capital by issuing sovereign bonds on international financial markets.

It would also leave just 2 countries in the continent, Mauritius and Morocco with a rating just above “junk status”.

Spillover from a downgrade could also affect Botswana, who sit lonely at the top with an A-class rating, and is heavily dependent on its neighbour for imports.

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