Beitrag vom 23.08.2019

The Africa Report

South Africa is close to ‘junk status’ from all three rating agencies. What comes next?

By Misheck Mutize and Sean Gossel

Evidence from around the world suggests that economic crisis often follows unanimous junk ratings.

The rating agency Fitch recently revised the outlook on South Africa’s long-term foreign-currency issuer default rating down from “stable” to “negative”. A credit rating outlook indicates the potential direction of the country’s rating over the intermediate term, typically six months.

Fitch pointed to the expected increase in the government debt-to-gross domestic product (GDP) ratio. This would make it more difficult to stabilise public debt. The country’s public debt has been increasing due to lower-than-projected tax revenue growth on the back of weak economic growth and the R59bn bailout for the power utility, Eskom.

South Africa’s long-term foreign-currency government bonds are rated BB+ by Fitch and BB by Standard & Poor’s. This means that the government bond is classified as substantially risky. Moody’s rating is Baa3, representing a moderate credit risk investment grade.

There is no indication that South African will soon curb its historically high and rising debt levels. Credit rating agencies have sounded the alarm about South Africa’s finances over the past five years. They have consistently called on government to stabilise the rising debt-to-GDP ratio, address high unemployment and low economic growth rate, and to restructure state-owned enterprises.

A lack of significant reforms led to the country being downgraded to junk status by both Standard & Poor’s and Fitch in April 2017. Only Moody’s has kept South Africa one notch above junk status. But for how long?

The revision by Fitch is significant. Looking at the experiences of some other countries in Africa as well as Brazil, the data suggests that when two of the three major ratings agencies downgrade a country to “junk”, it usually takes between six months to two years for the final agency to follow suit. Considering that both Fitch and S&P downgraded South Africa two years ago, it is likely that Moody’s will downgrade South Africa soon.

This would see South Africa’s government bond falling out of the Citigroup World Government Bond Index – a major global index that tracks investment-grade debt. All fund managers with investment grade mandates will be forced to offload South Africa’s debt. In turn this would wipe out capital inflows at a time when the country is in need of more foreign investment to close its current account deficit.