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The time is upon us for the second time this year when ratings agencies Moody’s, Standard & Poor’s (S&P) and Fitch are set to review the Credit Rating of South Africa. After having narrowly escaped a ratings downgrade by all three agencies earlier on in the year, markets will watch with bated breath to see if we have avoided or at least postponed the move towards a sub-investment grade rating in foreign currency credit for now.
Moody’s is first and is scheduled to release their review on the 25th of November. The current rating assigned by the agency to SA (local and foreign currency) is Baa2 with a negative outlook. This rating is considered two levels above the sub-investment grade or “junk” status and is the highest sovereign rating for SA of the three companies. While it is unlikely that we will see a move to “junk” by Moody’s, a move lower might set the precedent for what is to come in the following week, as Moody’s has been the most “lenient” of the three companies.
S&P is scheduled to release their review on the 2nd of December and is arguably the most significant agency to watch at present. The agency has the worst rating assigned to SA credit (in foreign currency) of BBB-, with a negative outlook. This is one level above “junk”. To avoid the downgrade, the agency will need to be satisfied with SA’s political stability (particularly within the finance ministry), outlook for growth and fiscal path set out in the medium term budget.
Fitch also has a rating of BBB- on South Africa’s foreign currency credit, although with an outlook of stable. The Fitch decision presents a bit more of a lottery scenario as a definitive date has not been set although the review is expected to be released within the week after the S&P rating decision.
Expectations are that we might see a one notch downgrade from the Moody’s rating agency, which would bring their view to a closer alignment with fellow ratings agencies, Fitch & S&P. A Bloomberg consensus of 12 economists suggests a marginal favouring of the S&P moving the country’s rating into “junk” territory, although many believe that South Africa might have just done enough to realise another six months grace as the group assesses how the fiscal path set out in the medium term budget speech transpires into the new year. Fitch might review the ratings outlook, although is not expected to downgrade the country’s credit rating just yet.
It would appear that the market has priced in a relatively high probability of lower credit ratings for South Africa, with bond yields trading and the cost of South Africa’s sovereign debt insurance (credit default swops) at elevated levels.
The risk for SA markets in the event of a downgrade (S&P in particular) have been advertised by the politics surrounding the finance minister politics recently this year and late last year. Rand would be expected to weaken 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.