Will Moody’s and S&P be as kind to SA as Fitch?
At about 11pm on Friday night, S&P Global Ratings and Moody’s are scheduled to release their latest verdicts on the creditworthiness of South African government bonds.
On Thursday at about 5.30pm, Fitch held SA’s sovereign credit rating at the BB+ "first tier of junk" level it downgraded the country to on April 7. Fitch maintained its outlook at stable, and the outlooks of the big three ratings agencies are important clues as to their next actions.
The ratings agencies tend not to downgrade countries before giving their governments three to six months’ notice, which is done by lowering their outlooks. Moody’s tends to lower its outlook from "negative" to "negative watch", while S&P and Fitch lower theirs from "stable" to "negative".
When they downgrade — as all big three ratings agencies were prompted to do by President Jacob Zuma’s disastrous Cabinet reshuffle on March 31 — they tend to raise their outlooks a notch to indicate their new rating is correct for the time being.
For instance, Moody’s on April 3 lowered SA’s outlook to "negative watch" and then reset it to "negative" when it cut the country’s credit rating to Baa3 from Baa2 on June 9.
This means Moody’s is more likely to lower its outlook to "negative watch" on Friday night than proceed with a cut to Ba1, which is equivalent to BB+ in the nomenclature of S&P and Fitch.
The nail-biter on Friday night is S&P, which held its outlook as negative when it cut the credit rating of SA’s foreign-denominated government bonds to BB+ from BBB- on April 3.
S&P splits its sovereign ratings into one for local-currency denominated government bonds and another for foreign-currency denominated government bonds.
S&P is widely expected to cut its rating of rand-denominated bonds to BB+ on Friday night, giving the same rating to foreign and local currency debt.
With both S&P and Fitch rating SA’s rand-denominated as junk, the consensus — two out of three — view of the big ratings agencies is that SA’s local currency bonds are junk, which might trigger institutional funds whose mandates prohibit them from owning junk bonds to sell.
"A ‘junk status’ ratings has implications for the economy, state debt costs, state-owned companies and the ordinary man on the street," the Treasury said in a statement responding to Fitch’s affirmation of SA’s BB+ status on Thursday.
"Since April 2017, when Fitch downgraded the country to ‘junk status’, the country has seen a recession, borrowing costs have increased, and revenue has underperformed.
"By not downgrading the country further, Fitch is providing SA with an opportunity to address issues that can lead to an upward revision to the ratings."