A R100bn is sword hanging over SA’s head, and it could fall on Friday
SA will confront the threat of a R100bn debt sell-off this week as it awaits two concurrent judgments on its credit status.
Opinion among economists is divided as to how stark a danger that is: 56% of respondents in a Bloomberg survey said S&P Ratings would reduce its assessment to the highest noninvestment grade on Friday.
Moody’s Investors Service, which is scheduled to make a decision, would probably leave it unchanged, according to three-quarters of those asked.
Should both agencies cut SA’s rating, rand debt would fall out of gauges including Citigroup’s world government bond index, sparking outflows of between R80bn and R100bn, Citigroup economist Gina Schoeman said.
This would raise borrowing costs for the nation that’s selling more debt to plug a widening budget gap.
Conflict in the ANC in the run-up to its leadership election next month has hamstrung efforts to bolster Africa’s most-industrialised economy, which had its second recession in less than a decade earlier this year.
Business confidence is near the lowest in more than three decades amid allegations of corruption against managers of state-owned enterprises (SOEs) and politicians including President Jacob Zuma.
"Given the fraught political context in which SA finds itself, alongside the negative repercussions of downgrades in triggering ejection from key bond indices, we believe that the rating agencies will not rush to cement decisions to downgrade this month," said Phoenix Kalen, director for emerging-markets strategy at Societe Generale in London.
The sustainability of SA’s debt will be at risk unless the government presents a credible fiscal-consolidation plan in 2018, Moody’s said after Finance Minister Malusi Gigaba’s medium-term budget policy statement last month.
While the outcome of the ANC’s December elective conference will be of interest to ratings companies, it is the February budget that they’ll be watching for clues on the country’s debt direction, said Annabel Bishop, the chief economist at Investec Bank.
"The budget will provide the fiscal detail that was lacking in the 2017 medium-term budget policy statement, which is needed in assessing SA’s creditworthiness," she said. "The likelihood has increased for SA to lose its remaining investment-grade ratings."
Investors are pricing in a downgrade of SA’s debt, with yields on dollar securities surpassing those of lower-rated countries such as Brazil and Russia.
Still, investors’ search for higher yields could help counter some of the expected outflows, Citigroup’s Schoeman said.
S&P and Fitch Ratings both rate SA’s foreign-currency debt at the highest junk grade. They lowered their assessments within a week of Zuma’s March 31 replacement of Pravin Gordhan with Gigaba as finance minister.
Moody’s, which has SA’s foreign-currency rating at the lowest investment grade, would not lower its assessment, 10 of 16 respondents in the Bloomberg survey said.