S&P downgrades South Africa's local currency debt to "junk" status

Jon Howard
November 26, 2017

"What this means is that S&P have effectively dialled back their "ratings clock" by 23 years and downgraded South Africa's sovereign credit rating to "junk status", DA's spokesman on finance David Maynier said Saturday.

Moody's opted to keep both the country's foreign- and local-currency ratings on Baa3, its lowest investment grade ranking, but put them on review for possible downgrade. It followed a similar announcement by third major ratings agency Fitch, affirming South Africa's rating at sub-investment or junk status on Thursday.

Combined with multi-year highs for various indicators of output, demand, employment and inflation in November, the market outlook for the single currency remains strong. "If both Moody's and S&P downgraded South Africa's local currency debt to junk‚ South African bonds would fall out of the Citigroup's World Government Bond Index (WGBI)‚ causing large worldwide tracker funds to sell out of their holdings of such bonds‚" said Matthews.

"As a outcome, South Africa's economy has stagnated and external competitiveness has eroded", it added.

"A momentous political agenda has overshadowed policy making, despite the deteriorating economy and weakening public finances", it said.

The agencies and investors worry that political jostling as the ANC prepares to elect a successor to Zuma in December could further derail South Africa from a viable economic path.

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"We note that both agencies [S&P and Moody's] commented on the importance of maintaining the integrity of institutions like the South African Reserve Bank and National Treasury, which is critical to ensuring that the financial sector is resilient and capable of supporting a recovery of the economy", said Nedbank in its statement.

This news is hardly encouraging, as South Africa's largest businesses have been in negotiations with the government of President Jacob Zuma since March, when the President replaced Finance Minister Pravin Gordhan with Gigaba. Partnership with business and labour is also crucial for restoring confidence.

"This makes it more expensive for our government to borrow money, and it increases the amount of the government budget that will be spent on interest".

S&P has already cut South Africa's foreign debt to sub-investment grade, but Moody's still rates the country above "junk" status for debt denominated in both foreign and local currency.

South African debt has already been dropped from one of the widely used global bond indexes, the JPMorgan Emerging Market Bond Index Global according to Matthews.

"Economic decisions in recent years have largely focused on the distribution - rather than the growth of - national income".

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