S&P Global downgrades SA to junk, Moody’s places SA on downgrade review

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S&P Global downgrades SA to junk, Moody’s places SA on downgrade review

9:50 CAT | 25 Nov 2017

Global ratings agency S&P Global Ratings on Friday evening downgraded South Africa’s long-term local currency rating to ‘BB+’, or junk, from ‘BBB-‘ with a stable outlook, while Moody’s has placed the country on review to be downgraded.

S&P also further lowered SA’s long-term foreign currency debt to ‘BB’ from ‘BB+’, meaning this debt is now on the second rung of non-investment grade.

Moody’s Investors Service then announced that it had placed the Baa3 long-term issuer and senior unsecured bond ratings of the government of South Africa on review for downgrade.

Both announcements occurred after 23:00 on Friday.

“Thus South Africa is still included in the world bond indexes,” TreasuryOne explained in a short noted after the two announcements. “Moody’s will see what happens with elective conference and budget in February 2018.”

The rand, which had been trading around R13.90 to the US dollar before the announcement, immediately lost 25 cents, to trade at R14.15/$.

On Thursday Fitch affirmed SA’s long-term foreign and local currency debt ratings at ‘BB+’ – commonly known as “junk” – with a stable outlook.

In a statement on Friday released just after 11pm, S&P said the downgrade “reflects our opinion of further deterioration of South Africa’s economic outlook and its public finances”.

“In our view, economic decisions in recent years have largely focused on the distribution – rather than the growth of – national income. As a consequence, South Africa’s economy has stagnated and external competitiveness has eroded.”

“We expect that offsetting fiscal measures will be proposed in the forthcoming 2018 budget in February next year, but these may be insufficient to stabilise public finances in the near term, contrary to our previous expectations.”

S&P had downgraded SA’s long-term foreign currency debt from ‘BBB-‘ to ‘BB+’ – or non-investment grade – in April, following the axing of Finance Minister Pravin Gordhan.

It kept SA’s long-term local currency debt at one notch about junk in April, lowering it to ‘BBB-‘ from ‘BBB’. But this has now also been downgraded to non-investment grade.

Moody’s said the decision to place the rating on review for downgrade was prompted by a series of recent developments, which suggest that South Africa’s economic and fiscal challenges are more pronounced than Moody’s had previously assumed.

“Growth prospects are weaker and material budgetary revenue shortfalls have emerged alongside increased spending pressures. Altogether, these promise a faster and larger rise in government debt-to-GDP than previously expected,” it said.

‘Weak economic growth’

Among the reasons given for the downgrade, S&P noted that:

A momentous political agenda has overshadowed policy making, despite the deteriorating economy and weakening public finances.
South Africa’s economic growth performance is among the weakest of emerging markets sovereigns, with less than zero per capita growth.
Income inequality is among the highest in the world and has worsened since the turn of the century.
Excluding agriculture and mining, South Africa’s services-dominated economy is barely growing. The private sector is investing less than the depreciation of the capital stock.
On a per capita basis, consumption is declining.
Since 2015, South Africa’s economy has not been creating jobs on a net basis.

Source: Fin 24