SA’s creditworthiness under scrutiny by S&P

2016-05-22 15:00

South Africa’s creditworthiness was closely scrutinised again this week, this time during a visit by analysts from Standard & Poor’s (S&P).

Like rival Fitch Ratings, S&P’s existing rating is just one point above sub-investment grade, or “junk status”.

This is in contrast to the way Moody’s Investors Service sees South Africa – earlier this month, it affirmed it was two notches above junk status.

However, S&P has its credit rating of South Africa on a “negative” outlook, while Fitch has its local rating on a “stable” outlook.

Should S&P downgrade South Africa to junk, the cost of local debt would be hiked, foreign money invested in state and corporate bonds could exit the country, and the rand might move to a historic low.

Gardner Rusike, an S&P analyst, confirmed that the agency’s analysts would be holding meetings this week ahead of the release of the S&P report reviewing South Africa’s credit rating, but declined to give details.

Nazmeera Moola, an Investec economist, said: “The probability of a downgrade is probably unchanged since the budget speech.”

Since the budget speech, National Treasury had reported tax income that met budgets but, on the other hand, the economic growth forecasts for the country kept falling.

Moody’s tends to focus on institutions and “event risk”, such as sudden devaluations of the currency.

“With them, it helps a little that we have very little hard currency debt and there is little rollover risk,” said Moola.

S&P tended to put GDP growth front and centre when it did its ratings reviews, she said.

“You can’t read anything from Moody’s decision into S&P’s one,” she said.

S&P’s decision on June 3 would be a “close call”, Moola said.

S&P rates the creditworthiness of 132 national governments worldwide, of which 68 are rated investment grade and 64 are rated as non-investment grade.

After announcing that interest rates would remain unchanged this week, Lesetja Kganyago, the governor of the SA Reserve Bank, said he would be meeting with representatives from S&P.

“What will I tell them? I will give them a copy of this monetary policy committee statement – it captures the Reserve Bank’s assessment of the economy,” he said.

Kganyago said that to protect a country’s credit rating, you needed to “protect your credit metrics”.

A ratings process included detailed looks at a country’s politics, institutions and their strength, the policy frameworks of the country, economic structure and economic performance, he said.

“I believe that we have taken significant steps to deal with the concerns that have been raised by ratings agencies,” he said.

Cas Coovadia, managing director of the Banking Association of SA, told City Press that he met with S&P’s team, but that they were “closed-door discussions”.

Last month, S&P’s Rusike said that one of the key pressures on the local rating was low growth and that an improvement in growth would stabilise the rating. South Africa is expected to grow by less than 1% this year.

However, the latest retail sales figures this week showed that quarterly local retail sales growth had dropped to 0.6%.

Annabel Bishop, an Investec economist, said that the retail sales figures indicated a potential contraction in GDP in the first quarter of 2016.

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