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South Africa is yet again waiting for ratings agencies to determine their investment grade rating fate on the 24th of November 2017. Both Moody’s Investor Services and S&P Global will release their latest verdict after the Jse’s closing bell.
As it currently stands, South Africa has already seen its foreign currency credit ratings moved to sub-investment (junk) grade by the S&P and Fitch ratings agencies, while Moody’s has kept their foreign credit rating for South Africa one notch above “junk”. Around 10% of Treasury’s debt issuances are in foreign currency.
The real concern is around the country’s local currency credit rating as around 90% of the debt issuances by Treasury are in local currency. Fitch has already moved ahead of it’s ratings agency peers by having also downgraded South Africa’s local credit rating to junk earlier this year. S&P and Moody’s are poised delicately with a rating of one notch above junk.
Following the new finance minister, Malusi Gigaba’s Medium Term Budget Speech, Moody’s has expressed concern over the expenditure ceiling and lack of fiscal consolidation planned in the budget, hinting at downgrades to come. The ratings agency did however in an earlier note suggest it may wait for an outcome at the ANC electoral Conference before moving on SA credit ratings, giving hope of some short term breathing room for South Africa.
S&P Global, known to be the more aggressive of the two ratings agencies scheduled to review SA credit on Friday, has echoed similar sentiment around the budget speech and looking towards the political landscape in December before making significant changes to South Africa’ s investment grade future.
Should either the S&P or Moody’s move the country’s local debt to sub investment grade, we are likely to see an initial weakening of the rand and capital outflows from our bond market. However, inversely the market might find relief if the downgrade decisions are shifted to after Decembers ANC Conference. Either way, it does however appear that a downgrade whether now or later is inevitable and been partly priced into bond and largely priced into Credit Default Swap (CDS) markets.