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Cape Town – Analysts agreed that it should come as no surprise that Fitch also decided to downgrade South Africa’s sovereign credit rating to junk status – the second ratings agency to do so in one week.
Fitch Ratings on Friday downgraded South Africa's long-term foreign- and local-currency to 'BB+' from 'BBB-'. It retained South Africa’s “stable outlook”.
BREAKING: Fitch downgrades SA to junk status
“It is the first (credit ratings) agency to have pushed SA’s local currency rating into ‘junk’,” said Jeffrey Schultz, economist at BNP Paribas. “Fitch took the decision in July last year to align its foreign and local currency ratings at BBB- with a negative outlook.
'Cabinet chaos'
“Similarly to S&P’s decision earlier this week, Fitch highlight that ‘recent political events’, including a major cabinet reshuffle, will weaken standards of governance and public finances.”
Schultz said the decision is likely to place further pressure on an already fragile rand, although it won’t necessarily spark massive foreign selling pressure out of South African government bonds yet.
“South Africa’s local currency rating is likely to remain in investment grade territory with both Moody’s and S&P for at least the next 12 months, we believe, which will mean that our eligibility for key global bond indices like Citibank’s World Government Bond Index will remain safe for now.”
Adriaan du Toit from Citi Research earlier said in a company note that “Fitch was itching to downgrade South Africa”.
Graph: Rand vs dollar currency on Friday
Source: Bloomberg
World Government Bond Index
He also pointed out though that Fitch does not form part of the World Government Bond Index equation, which measures the performance of countries’ fixed-rate, local currency and investment-grade sovereign bonds.
South Africa’s local currency rating from S&P and Moody’s is important for the purposes of the World Government Bond Index, Du Toit explains.
“South Africa runs the risk of being expelled from the World Government Bond Index if there is one more downgrade from S&P and a two-notch downgrade from Moody’s,” Du Toit said.
“Although the current and potential near-term ratings downgrades do not set the alarm bells ringing regarding forced selling from index trackers, the cushion of comfort is clearly being compressed and some non-index trackers might want to move to the sidelines until the local political trajectory is more comforting.”
Slippage
The slippage in SA’s credit rating elevates the importance of global bond indices’ inclusion criteria, according to Tumisho Grater, economic strategist at Novare.
"Emerging markets' debt has attracted growing attention from investors as a higher-yielding alternative over the years. And credit ratings below investment grade could see South Africa unable to participate in international bond indexes, such as the J.P. Morgan Emerging Markets Index and the Citi’s World Government Bond Index (WGBI), which requires both Moody’s and S&P’s long-term local currency rating to be below investment grade before removing a country from the index," explained Grater.
"Removal from the indexes could result in capital outflows and rand weakness, which could translate into higher inflation and a loss of business confidence. At the end of the day, this all impacts the average man on the street like you and I. Loss of investments has an impact economic growth, which hinders the country’s ability foster a nurturing environment for creating jobs."
