Cape Town - While restoring South Africa's credibility in the eyes of local and foreign investors will not be an easy road, South Africa should not currently be priced as a failed state, cautioned David Crosoer, head of research and investments at PPS Investments, ahead of the latest SA Reserve Bank (Sarb) rates announcement on Thursday.
He admitted that SA will in all likelihood be downgraded to sub-investment grade this year, but added that it doesn’t necessarily mean it is a failed state.
"While the risk associated with South African assets has increased because of heightened political uncertainty, it is harder to answer whether it is sufficiently reflected in the price," he said.
This is because it is very difficult to assign probabilities as to whether the country will be successful in tackling the sustainability of its debt. Should this fail, the discount on SA's debt will get substantially larger.
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"The rating downgrade to sub-investment grade will happen because of SA’s lacklustre economic growth, but most of the world is battling with economic growth and a number of countries are in a similar position," explained Crosoer.
"We can, however, influence how the international community perceives us, although recent controversies we’ve read about in the media haven’t done us any favours," he added.
"We have a number of exceptional politicians, business leaders and civil society activists who can all make a difference. And as citizens of this country we all have an obligation to hold our politicians to account if they do not meet our reasonable expectations."
In his view, the more critical question facing local and foreign investors is whether, despite being downgraded, SA can arrest this downward slide or if the downgrade is merely a sign of a lot worse still to come.
"While we have little control over the impending downgrade, we have all the control over what happens afterward," he said.
"A downgrade to sub-investment grade is already being priced by financial markets, because SA has limited ability to influence its economic growth rate, and global growth is weak."
He explained that SA's bond and currency markets are already pricing SA as sub-investment grade, but the discount will get substantially larger should the picture further deteriorate.
"The current crisis creates an opportunity for our politicians to turn things around, and for our managers to acquire attractively priced assets should the worse-case scenario not materialise," suggested Crosoer.
"This is in contrast with the rest of the world, where trillions of dollars of debt are traded at negative nominal yields and there is considerable risk of capital loss if politicians and central bankers don’t get things exactly right."
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