Why SA companies will ride out currency crisis better than their counterparts in Turkey
Deep and liquid local debt markets have reduced the need for South African companies to borrow abroad, making them less vulnerable to a financial crisis than peers in Turkey and other emerging markets, according to Moody’s Investors Service.
Large external financing needs and a plunging currency are proving a toxic mix for Turkey’s corporate sector.
But in South Africa, companies have enough access to local funding, and those that have turned to foreign debt used hedging strategies to cushion the effects of short-term currency fluctuations or buy time to adjust to long-term rand weakness, Moody’s said in a report dated September 12.
In addition, most foreign borrowing by South African companies has been driven by offshore expansion and the debt is serviced with cash flows generated in the same currency, creating a natural hedge to currency weakness, the report said.
"Currency volatility in emerging markets has been one of the key focus areas for investors this year, particularly in terms of how it affects credit risk for companies," Moody’s analysts lead by Dion Bate said in the report.
"Despite continued rand volatility, we expect the credit quality of most South African companies we rate to remain broadly stable during the next 12 to 18 months."
Less than half — 38% — of South African nonfinancial corporate debt is denominated in foreign currencies, according to Moody’s.
That compares with 56% for Turkey, or an amount of $336bn, almost triple the borrowers’ assets, according to data compiled by Bloomberg.
The lira’s 40% slump this year will make servicing those loans more burdensome, lowering capital spending and economic growth.
Moody’s expects the rand to remain volatile over the next year, driven by how successful the government is in implementing economic reforms, as well as global factors including the US policy path, trade tensions and emerging-market turmoil.
That will complicate the operating environment and investment decisions for South African companies, Moody’s said.
The rating agency also sounded an upbeat note on SA’s sovereign credit rating, saying a move is unlikely in the next eight months.