S&P kicks off downgrade
Since political turmoil gripped South Africa (EZA) last week, there have been speculations regarding a sovereign credit rating downgrade for the country. Moody’s – which had South Africa on negative watch – was supposed to deliver its stance on the rating first on April 7.
However, it’s S&P Global Ratings which has been a first mover on this front. The ratings major, which was expected to reveal its verdict is June, has cut the country’s sovereign ratings to junk. The decision, taken on April 3, saw the country’s foreign currency ratings slashed from ‘BBB-‘ to ‘BB+’. The outlook is ‘negative.’
The ratings agency stated that “the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes.” It further said “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.”
Major macroeconomic challenges
At this juncture, South Africa is facing macroeconomic headwinds. Its economy rose by just 0.3% in 2016, compared to 1.3% in 2015. Inflation has been coming down, but still stood at high at 6.3% in February 2017. Meanwhile, unemployment remains elevated at 26.5%.
Inequality is one of the biggest problems faced by the country. According to a government report in January 2017, Black Africans, who form nearly four-fifths of the country’s population, earned only a fifth of what Caucasians earned in 2015. This income disparity is reflected in the widespread poverty in the majority African community.
Bond raising to become difficult?
South Africa has been a large debt issuer from the continent. According to S&P Global, Angola, South Africa, and Nigeria, in that order, are expected to raise 82% of the gross $43 billion in long-term commercial debt in 2017. The ratings major also informed that only about 11% of the country’s total debt is denominated in foreign currency.
There are expectations that the country may approach international debt markets this year. But with the credit rating downgrade, the borrowing costs of South Africa are nearly certain to go up. If this rise is substantially high, then it may force the country to rethink bond issuance in foreign currency.
S&P Global had ranked the country one level above junk. Meanwhile, Moody’s ranks the country’s two levels above junk on its scale. If it also cuts the rating of South Africa by two notches to junk in its upcoming review on April 7, then it will ensure higher borrowing costs for the country and will put any sort of reform program in jeopardy.
A negative view will also make things worse for the country’s financial assets. Let’s look at them in the next article.