Can South Africa Recover From Junk Status? 1

South Africa downgraded to junk status

Last month, rating agencies Standard & Poor’s and Fitch downgraded South Africa’s (EZA) credit rating to junk status following recent political turmoil. Both agencies downgraded South Africa’s debt by one notch to junk status and have a negative outlook while Moody’s has put it under review for a possible further downgrade.

S&P assigned an updated debt rating of BB+ while Fitch rates it BBB-, both one level below investment grade. Moody’s has a rating of Baa2 currently, already two levels below sub-investment grade.

Apart from cutting ratings of the economy, Fitch also downgraded issuer ratings of five of the largest South African banks – Absa Bank, FirstRand Bank (FANDY), Investec Bank, Nedbank and Standard Bank of South Africa (SGBLY). Apart from this, issuer ratings of the holding companies of four banks were also cut. These banks are Barclays Africa Group Limited (AGRPY), Investec Limited (ITCFY), Nedbank Group Limited (NDBKY) and Standard Bank Group Limited (SGBLY).

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The possibility of a further downgrade?

Recently, the central bank of South Africa also highlighted the high probability of a further downgrade. Another round of downgrades may weaken the currency further and have a substantial impact on the country’s financial stability. It might also lead to a flight of capital from the country with a subsequent sell-off. “Further downgrades on the local currency rating could trigger high levels of selling off of bonds by foreign investors, which could also result in marked currency depreciation,” the Reserve Bank said. Executives from Moody’s are slated to visit South Africa in the coming weeks to assess the situation in the country.

In this series, we will study the risks from downgrades to South Africa and analyze its banks. We will also assess whether these banks are still attractive and deep dive into their financial indicators.

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