This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Fitch has kept the country’s local currency rating at BBB-, which is one notch above the sub-investment grade (junk) level, although the group has moved its outlook from stable to negative. The ratings agency has noted political risks relating to policy making and governance as key factors posing threats to South Africa’s credit rating.
Moody’s has also kept South Africa’s local currency credit rating unchanged, but at two notches above junk (Baa2) with a negative outlook. The agency also recognised risks pertaining to political uncertainty as well as the ability to implement structural reforms and renew business confidence as threats to the country’s sovereign rating.
While there has been some relief from the first two ratings agencies reports, Standard & Poor’s remains the most important ratings agency and is set to report on Friday the 2nd of December 2016. The agency has a rating of BBB- (outlook negative) for South Africa and has been the more aggressive agency in terms of its view on South Africa’s credit (a view now aligned with by Fitch).
While South Africa is not quite out of the woods just yet, investors will be hoping that the first set of reviews might be setting a precedent that the country’s sovereign credit rating might just be preserved for the time being.
As noted previously, the risk for SA markets in the event of a downgrade (S&P) should see the rand weakening as the level of foreign investment retracts from the country, while bond yields rise and prices fall. Local banking counters, followed by the retail sector are the most likely negative beneficiaries of such a ratings decision. While this is a broad base case, it does appear (as mentioned earlier) that a lot of the danger of a ratings downgrade has been priced in and one would be hopeful that the downside would be limited.
Aversion of a rating downgrade (S&P in particular) is expected to produce the inverse scenario alluded to above, where strength could return to the rand, bond yields fall while prices rise. Banking followed by local retail would be expected to be the short term beneficiary of such a move.