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Johannesburg - Credit default swaps show the nation’s credit rating may be due a downgrade, and economists agree. Twelve of 13 analysts surveyed by Bloomberg said Fitch Ratings will this week cut its assessment to BBB-, the lowest investment grade.
While Standard & Poor’s should keep its rating at one level above junk, some analysts are predicting the company will lower its outlook to negative. Both companies publish their reviews on December 4.
“The rhetoric from Fitch has had a negative bias, in particular the fact that the government sort of softened its stance on fiscal consolidation in the Medium-Term Budget Policy Statement,” Carmen Nel, an economist at FirstRand’s Rand Merchant Bank unit, said by phone from Cape Town on November 25.
“It is largely the combination of the fiscal position which is increasingly being compromised by the weak growth backdrop.”
South Africa narrowly avoided a recession in the third quarter, posting 0.7% annualised growth after a 1.3% contraction in the previous three months as electricity shortages, low global demand and falling metal prices stifled output. Finance Minister Nhlanhla Nene cut the growth forecast for this year to 1.5% from 2% in his mid-term budget last month. Tax-revenue projections fell, forcing Nene to push out the timeline to lower the budget gap to 3% of gross domestic product.
Investors already consider South Africa almost as risky as some junk-rated countries. The cost of insuring against a default by the government for five years using credit default swaps is 42 basis points higher than for similarly rated Colombia, according to data compiled by Bloomberg.
The South African contracts are more expensive than Turkey’s and 5 basis points below that of Russia, which is tackling a recession, involvement in two conflicts and international sanctions linked to the fighting in Ukraine.
“We have to accept that at least a Fitch downgrade is to a large extent already priced in,” Elna Moolman, an economist at Macquarie Group, said by phone from Johannesburg. “One also has to accept that investors are worried about the possibility that S&P might downgrade us.”
South Africa is unlikely to immediately face credit downgrades to junk by two ratings companies, Konrad Reuss, S&P’s sub-Saharan Africa managing director, said on November 26.
While all 13 economists in Bloomberg’s survey said they expect S&P to leave its rating unchanged, three forecast that the outlook on the assessment will be cut to negative. The reduction from stable would place the nation on notice of a possible drop from investment grade.
The nation’s “credit metrics are certainly not improving, but also they’re not going over a cliff”, Reuss said. “The medium-term question for us is ‘do we have to change the outlook to reflect that'?”
A downgrade could trigger an outflow of foreign capital and increase the cost at which the government borrows, Nene said on October 21 when he projected debt will reach almost 50% of GDP this year.
Moody’s Investors Service, which has a stable outlook on South Africa’s Baa2 rating, the second-lowest investment level, has not given a date for its next review.
Fiscal deficit
“The main focus of the rating agencies will be the extent to which the government can control the fiscal deficit, but in our view, it will be difficult to see a substantial improvement there,” Regis Chatellier, an emerging-market credit strategist at Societe Generale SA, said by phone from London on November 25.
The rand weakened 0.1% to R14.3947 per dollar as of 07:23 in Johannesburg on Monday after falling 3.1% last week, taking its decline for the year to 19%. The yield on rand-denominated government bonds due December 2026 was little changed after rising five basis points to 8.55% on November 27.
“It would be imprudent not to factor in such a risk scenario,” RMB’s Nel said, when asked if South Africa could be rated junk.
