Share

Possible slide to 'junk' welcomed by yield-hungry investors

Johannesburg - While South Africa's policymakers fear a possible downgrade of the country's debt rating next week could derail reforms, some fund managers see it as a buying opportunity.

Africa's most industrialised nation has been edging towards losing its investment-grade status due to weak growth, large deficits and political scandals surrounding President Jacob Zuma, including changing two finance ministers in December.

Standard and Poor's and Fitch deliver their decisions on the sovereign rating next week.

Policymakers fear a downgrade to "junk" status could trigger a mass exodus of investments and higher borrowing costs. But higher bond yields, typical after a downgrade, will be welcomed by some investors in a year when equities have flatlined and interest rates in developed markets hover near zero.

Fitch and S&P's both rate South Africa debt at BBB-, one notch above speculative grade.

Seen by numerous analysts as the most likely to push South Africa to "junk" status, S&P said earlier in May that the weak economy posed an immediate risk to the rating. S&P is due to publish its review on June 3.

"I think bonds at 9% offer a very decent yield considering that inflation in the medium to long term is expected at 6% to 7%. It means you'd get a good 2% to 3% real return on bonds," said investment specialist at Investec Asset Management Louis Niemand.

"If it were to go back to "Nene-gate" levels it would be a screaming buy," said head of market and economic research at Investment Solutions Lesiba Mothata.

Mothata was referring to the sharp sell-off in December that followed Zuma's shock sacking of Nhlanhla Nene as finance minister, when bond yields soared to 10.6%, their highest level since the 2008 global financial crisis.

Mothata said 90% of South Africa's R2.2trn debt was in local currency and rated as investment grade.

Analysts said only a political upheaval could push the rand denominated debt into junk territory.

"Things would have to deteriorate quite a bit in terms of South Africa's institutional makeup, central bank independence, fiscal policy and economic growth. And at this stage that seems very unlikely," said investment analyst at Old Mutual Wealth Izak Odendaal.

South Africa's local elections on August 3 will be the sternest political test that the ruling African National Congress has faced since coming to power in 1994, analysts say.

Unemployment hit its highest level on record in the first quarter, while the economy is expected to grow by less than 1% this year, clouding efforts by Finance Minister Pravin Gordhan to fight off a credit downgrade.

"The downgrade to subinvestmmet will likely trip another 200 000 jobs within the formal economy," Chief economist at Standard Bank Goolam Ballim said.

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.93
+0.0%
Rand - Pound
23.90
+0.0%
Rand - Euro
20.40
+0.1%
Rand - Aus dollar
12.33
+0.1%
Rand - Yen
0.13
-0.0%
Platinum
908.05
+1.2%
Palladium
1,014.94
+1.3%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders