SA's credit rating blow

Jan 11 2013 09:34
Peter Attard Montalto
Guest columnist Peter Attard Montalto of Nomura writes about the latest Fitch downgrade of SA:

FITCH has downgraded South Africa from BBB+(negative) to BBB(stable). The long-term local rating was downgraded by two notches from A to BBB+.

Another SA downgrade is a little bit of a surprise from Fitch, but not much. We thought they would go before Mangaung, but we also thought the positivity after the conference could make them pause.

However, the underlying issues were deteriorating too much for them. Similarly, a downgrade was certainly priced in before Mangaung in the market, but some of it probably got priced out after.

Fitch very much replicates the other agencies in talking about rising social and political tensions, corruption and deteriorating “government effectiveness” – all affecting public finances over the medium run (highlighting particularly the slipping of consolidation paths in the medium-term budget policy statement).

Importantly, they also highlight that competitiveness is falling, and they make direct reference to labour unrest.

The stable outlook, however, is given due to underlying strengths (including the banking system), which offsets a path of gradual deterioration in creditworthiness vs BBB peers. The local rating cut of two notches reflected the shift in public finances and the volume of debt in local currency vs FX.

We think that all agencies now “price in” the short-run fiscal issues into budget and through this year, so further downgrades are unlikely before the medium-term budget policy statement unless we have a marked deterioration in labour unrest (ie, more than simply a repeat of last year).

There is probably not enough on the fiscal side this year, or growth to prompt more at this stage. Medium run further downgrades will occur, in our opinion, given the lack of implementation of the EDP, and our view remains that the medium run rating bias is negative.

We would agree with Fitch and see the move as justified. Indeed, we worry that in our baseline many of the negative rating sensitivities that Fitch highlights come true – in particular that there is a failure to generate faster employment growth, structural reforms remain slow and so there is little improvement in competitiveness.

The mining tax uncertainty that remains after Mangaung is also seen as a key negative by the agency.

The impact of this move on markets is likely to be minimal, however, given we are not at a benchmark or real money mandate threshold and equally Fitch is of secondary importance to S&P and Moody’s in terms of such portfolio construction (eg the World Government Bond Index).

Nevertheless it makes us happier to have a bias towards shorter duration than longer in the short to medium run.

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fitch  |  credit rating



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