Rand loses almost 3% in half an hour of news
Last week’s shock cabinet reshuffle has tipped South Africa over the edge of the investment-grade cliff, with S&P Global Ratings downgrading the country’s foreign currency rating to “junk” status last night, sending markets into a tailspin.
In more bad news shortly before midnight, Moody’s announced that it had put South Africa on review for a downgrade.
The rand lost almost 3% within half an hour of S&P’s announcement.
The cut to junk status will make it more expensive for the government, state-owned enterprises and private sector firms to borrow on international markets and is likely to dent confidence and growth prospects.
“It is very disappointing and I wonder how many South Africans will wake up today to realise how much poorer they have become, and how many unemployed South Africans realise how much harder it will be for them ever to find a job,” Nedbank chief executive Mike Brown.
He is also on the ratings stream of the CEO Initiative, which had been working with ousted finance minister Pravin Gordhan to avert a ratings downgrade and boost confidence in the economy, said.
Banking Association chief executive Cas Coovadia said 16 months of hard work by the CEO Initiative, labour and the government to stave off a downgrade and reassure investors had been destroyed in one fell swoop and the president should be held accountable.
The cost of money would go up, inflation would go up and ordinary poor people would suffer, Coovadia said.
Econometrix economist Azar Jammine said: “Reduced inflation is going to be neutralised.
“We may even see a rise in interest rates.”
Other economists were less pessimistic, with Capital Economics’ Africa economist John Ashbourne saying the move was hardly a surprise and he doubted it would have a significant market impact.
Ratings agency S&P, whose next review had been due only in June, decided at an emergency meeting at the weekend that the economic crisis President Jacob Zuma had plunged the country into with his midnight reshuffle on Thursday was too severe to wait until then to do the review.
It said the executive changes initiated by Zuma had put at risk the country’s fiscal and growth outcomes, increasing the risk of policy shifts that could be negative for economic growth and fiscal discipline.
S&P also put a negative outlook on the new BB+ rating, suggesting a further downgrade could be on the cards if it sees deterioration in South Africa’s economic or fiscal performance.
Moody’s said the abrupt change in leadership of key government institutions raised questions about reforms essential to sustain South Africa’s fiscal and economic strength and could have an immediate impact on economic growth and public debt levels.
Moody’s has South Africa’s rating at two notches above sub-investment grade, so a one notch cut would not pitch the country into junk territory on the Moody’s scale.
But economists are suggesting that Moody’s could opt for a two-notch downgrade.
That would mean South Africa is sub-investment grade on two of the major rating agency scales, putting it into true “junk” territory and forcing a bond sell-off by foreign investors whose mandates limit them to investment-grade assets only.
Ratings agency Fitch could also act after it said on Friday that the cabinet reshuffle signalled a change in policy direction and potentially weakened public finances and standards of governance.
S&P is the only one of the three agencies that has a local currency rating on South Africa that is higher than the foreign currency rating, and although it also cut the local currency rating by one notch last night, that still left it at an investment-grade BBB minus.
The Treasury said that while S&P had lowered its rating of foreign currency-denominated debt, “rand-denominated debt, which constitutes 90% of the debt portfolio, retains its investment-grade rating”.
The government’s policy orientation remained the same even though the leadership of the finance portfolio had changed, the Treasury said, calling for South Africa to reduce reliance on foreign savings to fund investment and to rely less on debt to finance public expenditure.
Analysts said it could be a long, hard road back to investment grade, with countries typically taking eight to 12 years after they had been cut to junk to restore their investmentgrade status.
“If we respond with more populist policies I wonder if we will ever get back to investment grade,” Brown said.
“But if the country sees this as a signal to address the real issues facing our economy then it is possible we could claw our way back.”
S&P said its action reflected its view that contingent liabilities to the state, particularly in the energy sector, were on the rise and previous plans to improve Eskom’s financial position might not be implemented on time and comprehensively.
“In our view, higher risks of budgetary slippage will also put pressure on South Africa’s cost of capital, further dampening already modest growth.”
S&P said it could revise the outlook if it saw political and economic risks reduce.