Saturday, April 08, 2017

Fitch Cuts South Africa’s Credit Rating to Junk
Rating agency follows S&P’s lead after ousting of finance minister knocks confidence

by Joseph Cotterill in Johannesburg
Financial Times

Fitch has become the second major rating agency this week to cut the South African government’s sovereign credit rating to junk status, after the dismissal of respected finance minister Pravin Gordhan knocked confidence in President Jacob Zuma’s commitment to sound economic policies.

Downgrading South Africa from triple B minus to double B plus on Friday, Fitch said that “recent political events” would “weaken standards of governance and public finances”.

On Monday, S&P cut South Africa’s foreign currency debt to below investment grade but Fitch’s additional downgrade could threaten the country’s position in global bond indices used by large institutional investors to benchmark their holdings of debt.

Fitch is the first major rating agency to include South Africa’s rand-denominated bonds in a downgrade to junk. The bonds, which are a third held by foreign investors, make up the majority of its debt.

The downgrades risk triggering capital outflows, raising South Africa’s borrowing costs and will add pressure on to the volatile rand.

Mr Zuma sacked Mr Gordhan, who had clashed with the president over corruption and cronyism in state-owned companies, in a midnight reshuffle last week and replaced him with Malusi Gigaba, who has little finance experience.

The appointment of Mr Gigaba, a close ally of the president, sparked concerns that Mr Zuma is seeking a pliant hand on the state’s coffers — and one who is willing to accelerate an expensive nuclear power project that the Treasury resisted under Mr Gordhan.

Differences over the nuclear deal “may have also contributed to the decision for the recent reshuffle”, Fitch said. “Under the new cabinet, including a new energy minister, the programme is likely to move relatively quickly,” it added.

The rating agency said that fiscal consolidation would “be less of a priority” for Mr Gigaba, who has spoken of accelerating a radical economic transformation — hinting at more redistributionist policies aimed at increasing black ownership of the economy.

The rand has tumbled more than 10 per cent against the US dollar in the past fortnight, and the ratings downgrades will compound ebbing confidence in Africa’s most industrialised economy. It is already in the doldrums with growth of less than 1 per cent last year.

Investors “who had previously dismissed the risk of South Africa losing its local currency investment grade, will now need to be more alert to this possibility”, said Razia Khan, the chief economist for Africa at Standard Chartered.

The Citi World Government Bond Index, one of the largest and most traded indices, will kick South Africa out if S&P and Moody’s junk their local debt ratings for the country.

Moody’s this week said it had placed its South Africa rating on review for downgrade, a process that could take up to three months, although it may act sooner.

JPMorgan analysts estimated this week that up to $2.4bn of South Africa’s foreign bonds could be sold if they are excluded from global indices. South Africa typically issues about $2bn in foreign currency bonds a year.

Investors could sell between a further $6bn and $8.5bn if South Africa falls out of global bond indices altogether over its local rating being junked, the JPMorgan analysts said.

“However, if it were to happen, it would be staggered so the cumulative amount of selling is likely to be spread out and unlikely to trigger another bout of sharp asset price weakening beyond what we have seen already,” they added.

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