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Downgrade: Where to now?

Apr 09 2017 09:12
Justin Brown

Johannesburg - The effect on investor confidence in South Africa is the main concern arising from the downgrading of the country’s credit rating by S&P Global and Fitch Ratings to “junk” status this week, following President Jacob Zuma’s Cabinet reshuffle.

This is because investor confidence will affect economic growth and employment.

The results of the downgrade will only become clear in the weeks and months ahead.

Jeffrey Schultz, an economist at BNP Paribas, said investor confidence would take a hit from the downgrade and this would harm fixed and foreign direct investment.

Nedbank economist Isaac Matshego echoed these sentiments, saying growth would be a key factor related to business confidence.

“The effect on business confidence is the biggest risk following the downgrade,” he said.

The SA Chamber of Commerce and Industry announced this week that its business confidence index had pulled back by 1.7 index points to 93.8 in March.

“This business reading would not have captured recent developments,” Matshego said.

The biggest immediate effects of the downgrade have been the rand’s depreciation and the loss of billions of rands in the value of local banking stocks.

The downgrade has also put on ice hopes of a cut in local interest rates.


The agency moved on the downgrade following Zuma’s decision to reshuffle his Cabinet last week.

The decision included replacing former finance minister Pravin Gordhan, in whom investors had confidence, with Malusi Gigaba.

Schultz said Moody’s Investors Service was also likely to downgrade South Africa’s rating in coming weeks.

South Africa’s major banks – Barclays Africa, Capitec, FirstRand, Nedbank and Standard Bank – collectively lost R134 billion in market value from March 27 until April 7.

On the morning of March 27, the rand had strengthened to R12.31 to the dollar, before the news broke that Zuma had instructed Gordhan to return home from an international roadshow.

When the news was announced, the rand lost as much as R1.62 to the dollar. Our currency was quoted at R13.81 to the dollar on Friday.

Schultz said the rand was likely to maintain its weakening trend and would probably be quoted to above R14 to the dollar by year-end.

Moody’s, which has South Africa two notches above junk status, also put the country’s credit rating on review for a downgrade this week.

The agency is likely to announce the result early in May or by early July at the latest.

Fitch has expressed concern that the Cabinet reshuffle could weaken public finances and standards of governance.

The agency indicated that it was concerned that Gigaba would focus on radical socioeconomic transformation, which has been defined as changes “in the structure, systems, institutions and patterns of ownership, management and control of the economy in favour of all South Africans, especially the poor”.

Matshego said the bank had not yet changed its growth forecast of 1% for 2017.

“The situation is uncertain and we do not know what will transpire. We will wait for things to settle,” he said.

This week, S&P Global kept its forecast for South Africa’s growth unchanged at 1.4% this year and 1.8% in 2018.

The agency is also expecting South Africa’s unemployment figure to drop slightly to 26.3% next year from 26.5% this year.

Schultz said the trend of poor growth was likely to continue.

Tinyiko Ngwenya, an economist at Old Mutual Investment Group, said S&P Global had downgraded South Africa because of political uncertainty and its effect on the fiscus.

Ngwenya said although Gigaba had indicated that there would be no change in fiscal policy, this was “all talk” at this stage.

It needed to be backed up by “hard data” and evidence.

In May last year, Standard Bank economist Goolam Ballim said S&P Global’s decision to place South Africa’s credit rating at sub-investment grade would unleash a “shock” that could knock the country into recession and place 200 000 jobs – plus a further 600 000 related dependents – at risk.

However, Schultz said he did not believe that this week’s downgrade would result in a recession, at least not this year.

In May, Ballim had also said financial markets factored in credit downgrades to some degree, but that the “real economy, where the income and employment manifest”, would be in for a major adjustment because of a credit downgrade.

He added that although financial markets tended to convulse before a downgrade, the “real economy smashes afterwards”.

Matshego said: “It is all about the currency. There are fears that there will be a notable shift in government policy, and then the currency will come under pressure.

“The SA Reserve Bank will be forced to hike interest rates, which in turn will affect growth rates.

“In some cases, such downgrades to sub-investment level have caused recessions or a mild impact on growth.”

After the downgrade was announced, the effect on the rand’s exchange rate had been muted as a lot had already been factored in, Matshego said.

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