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South Africa’s road to ‘junk’ status has been well documented, with political analyst RW Johnson predicting such a path in his book ‘How Long Will South Africa Survive‘. And while South Africa is perilously close to this cliff, which will open doors to problems the country can ill afford, Stanlib’s chief economist Kevin Lings puts everything into context. Over the past eight years, according to Standard & Poor’s bi-annual review, sovereign rating downgrades have outnumbered upgrades, with an average of two downgrade ratings every month over the past five years. South Africa currently sits on BBB-, the global average is between BBB and BBB-. Of the 131 countries S&P rates, 25 have a negative outlook and only 8 are positive, which does suggest further global pain. The only region with a positive outlook is Asia. Another downgrade for South Africa will however make it one of the worst performing countries since 2008 when it comes to soveriegn credit ratings. In Pravin Gordhan South Africa trusts. – Stuart Lowman
By Kevin Lings*
Recently Standard & Poor’s published their bi-annual review of sovereign credit rating trends around the world. S&P currently rates 131 countries and continues to add new countries on a fairly regular basis. (Government bonds remain the most important asset class globally in terms of borrowing).
Overall, the data provided by S&P shows that the average sovereign credit rating around the world has fallen by about one notch since 2008 (SA has been downgraded by two notches by S&P since 2012). In other words, sovereign downgrades have outnumbered upgrades in the past 8 years, with S&P lowering an average of two sovereign ratings per month over the past five years. (The average international credit rating is currently between BBB and BBB-. South Africa is rated at BBB-).
Twenty five countries currently have a negative ratings outlook (including South Africa) while only 8 have a positive ratings outlook; suggesting that sovereign credit ratings are likely to decline further in 2016. The Middle East, Africa, and CIS account for most negative outlooks globally (12), followed by Europe (7), and Latin America and the Caribbean (5). Asia is the only region with a positive outlook balance. (S&P’s rating outlooks are intended to indicate their view of the potential direction of a long-term credit rating, typically over six months to two years for investment-grade ratings (‘BBB-‘ and higher) and six months to one year for speculative-grade ratings (‘BB+’ and lower). A positive or negative outlook is intended to designate at least a one-in-three likelihood of a rating change in the indicated direction).
Just over 53% of all rated sovereigns are investment grade (‘BBB’- or above), which is the lowest level it has ever been. It would appear that is due to both S&P taking on new sovereign ratings, but also disappointing economic performance in a number of countries, including Brazil and Russia.
The average international credit rating, weighted by countries’ GDP, has also trended downward in recent years, standing marginally above ‘A+’. In mid-2008 this rating measures was recorded at ‘AA-‘. Throughout the past decade, sovereigns rated in the ‘B’ category have made up the single-largest portion of all ratings, currently 37, up from 32 five years ago. The share of sovereigns rated in the ‘B’ category has risen to an all-time high of 28% in December 2015 from 25% five years ago.
At the other end of the spectrum, the number of ‘AAA’ rated sovereigns has declined to 13, from 19 in December 2010, mostly due to downgrades in the Eurozone, but also as a result of S&P lowering the long-term rating on the US to ‘AA+’ in August 2011. Following the upgrade of The Netherlands to ‘AAA’ in late 2015, the ‘AAA’ share is off its all-time low of 9% of all ratings recorded in mid-2015. One ‘AAA’ sovereign rating, namely the UK, currently has a negative outlook (11 December 2015) due to EU referendum uncertainties.
It is clear that the ratings downgrade South Africa has experienced in recent years is not exceptional when compared with the global trend. In addition, the rating downgrades have been especially evident amongst commodity exporters. This does not mean that South Africa should be complacent about further downgrades. Instead, it is critical that the policy officials do all they can to help South Africa avoid any further downgrades. A move to below investment grade would make South Africa one of the worst performing countries since 2008 with regard to the performance of sovereign credit ratings.
- Kevin Lings is chief economist at Stanlib
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