South Africa’s sovereign credit rating has just been downgraded by Standard and Poor, from BB to BBB-. Fitch has also just changed its outlook on us, from ‘stable’ to ‘negative’. Many would argue that the rating agency’s adjusting their views was expected, with the compounding of South Africa’s labour unrest and an economy with slowing growth numbers being the predominant culprits. It seems as though the horizon for South Africa and its economy, is bleak with little good news in store for us. The revised outlooks, and all of their repercussions, result in a number of questions and concerns for the South African economy. Ravi Bhatia, Primary Analyst from Sovereign unpacks the reality of S&P’s move, and offers some very welcome words of comfort. The outlook is not as grim as it sounds, and South Africa’s stability is not under as much threat, as the word ‘downgrade’ incites. – LF
ALEC HOGG: Friday 13th lived up to its name last week: unlucky for some when ratings giants Standard & Poor downgraded South Africa’s sovereign credit rating by a notch to BBB-. That happened soon after the markets closed. Joining us on the line from London is Ravi Bhatia, S.A. Primary Analyst from Sovereign. It’s was quite predictable Ravi, the fact that there was going to be a downgrade. S&P had warned the country on numerous occasions what it was looking for. When that did not transpire… In fact, when it went the other way, I guess we had to expect or anticipate that there was a downgrade, and yet there were still some who thought we might have been able to hold steady. Was that ever a possibility in your mind?
RAVI BHATIA: Well, I don’t think it was predictable as such. I think the fact that we now have a fixed rate, that we’re given advance that we’re going to publish on…there was a lot of speculation on which direction the rating would move. Of course, South Africa has been plagued by the strikes, which was one of the factors that we considered. What we’ve seen is that the Q1, Q2, and probably even Q3 will be affected by these long strikes in the platinum sector, but it’s more of a continuum. Growth in South Africa has been lacklustre for quite a while now. Every year, we’ve had a problem – a strike issue. This year, it’s platinum. Last year, it was the automotive sector and the year before that was of course, the dreadful trouble at Marikana. It’s therefore really a growth story. We’re concerned on the external side as well, regarding the current account and it’s financing in the context of the U.S. tapering.
ALEC HOGG: The next move is going to be the key one though isn’t it, because we’re now at BBB-. It’s only one level above junk. When is S&P going to be making its forthcoming announcement? When’s the next one?
RAVI BHATIA: Well, our next scheduled review on the rating will be in early December, after the MPBPS and we’ll be visiting South Africa, as well. Yes, the foreign currency is now at the lowest level of investment grade, and another move down would move it into sub-investment grades. I’d like to point out that the bulk of South African debt is Rand-denominated and on the local currency, the rating is still BBB+, which is significantly far away from the bottom end of your investment grade. That’s a strong rating and we give South Africa a lot of benefit for having deep financial markets in Rand-denominated financial markets. Hence, the difference between local and foreign currency. Of course, in December we’re going to review based on all the facts but currently, we have a stable outlook at this new lower rating level.
ALEC HOGG: What needs to be done to retain that outlook? We do know from the previous reports, and even in this one, that S&P does wave flags.
RAVI BHATIA: Well, we’re basically assuming that at some point this year, the labour tensions will be resolved, and also that the slow economic growth will not really have a large impact on the critical or external balances and that they’ll be in line with our new expectations and numbers as published in the report. That’s what we’re looking for at this new rating level. Of course, if the strike is prolonged and carried on, or if there’s a new strike etcetera, and growth is even more lacklustre then we will review our current forecast of one-point-nine percent for the year. It depends on the circumstances at the time.
ALEC HOGG: Ravi, I don’t want to unnecessarily put you on the spot, but clearly, this is extremely important for South Africa if you guys at S&P decide to cut the rating again. If things continue as they are…if NUMSA has the strike that it has been threatening, and if it goes for on for as long as the platinum strike has continued, would that lead to a downgrade?
RAVI BHATIA: Well, we factored in quite a bit of strike action and low growth into the current rating level, and so we have new and revised lower growth expectations, as well as higher critical deficit expectations. The threshold has moved down for South Africa, if you see what I mean. If there’s a significant change and growth, and we’re in a recessionary environment for a prolonged period of time etcetera, of course, we will review again. However, as it stands now, we’re at this lower rating level, we’re at a stable outlook, and we’ll see how things are later in the year.
ALEC HOGG: Just so that we have benchmarks: is a lower rate of growth…is that the one-point-nine percent GDP growth, and what is your budget deficit number?
RAVI BHATIA: Yes, one-point-nine is our number on the growth story. I’m just looking at my figures now. Yes, what we’re looking at for 2014 is four-point-three on the General Government Balance – a fiscal deficit of four-point-three. Having said that, it’s just so that South Africa comes a few percentage points above the rating action. We consider these to be broad parameters and we consider them alongside many other factors, including soft factors such as political and institutional risk etcetera and the case of reforms. It’s a mixed picture. You can’t just say that one number will move the ratings.
ALEC HOGG: All right, and just to close off, if South Africa were to have its paper downgraded to junk – in other words, we get away from the BBB- and into the C’s – what impact would that have?
RAVI BHATIA: Firstly, it will be from BBB- into the BB category, which is well above the C’s, as you mentioned. In addition, it’s not junk. It’s actually sub-investment grade that South Africa would move down to. There are some pension funds that limit themselves to investment grade, but as I mentioned earlier, the bulk of the South African market is Rand-denominated so really, the local currency rating would have to go into the sub-investment grade region before these pension funds would move out of the market. As I said, that’s two notches higher, which is well within investment grade.
ALEC HOGG: Well, that’s a little bit of ‘better news’ then from Ravi Bhatia, who’s S.A. Primary Analyst at S&P. S&P is the company that downgraded South Africa to BBB-. The next level is to BB (sub-investment grade) – some people call it junk. He says its sub-investment grade. I suppose it’s like when we had sub-prime mortgages in the United States.
