SA bonds likely to follow Brazil soon, already priced for downgrade to junk

This morning’s news that S&P has downgraded Brazilian bonds to “junk” status has raised speculation about which country will be next. Fitch added to speculation that South Africa is next when a director told a conference in London today that the country’s “risk of downgrade is increasing.” (see story at the bottom). It also doesn’t augur well that earlier in the week Fitch handed back its licence ahead of leaving SA. With the country’s bonds trading in global markets as though they were already below investment grade, something special is required to reverse what looks like a foregone conclusion. – Alec Hogg    

S&P analysts

By Marc Jones

LONDON, Sept 10 (Reuters) – Financial markets are betting that Russia, South Africa, Turkey and Colombia will be next in line for “junk” debt status after Standard & Poor’s stripped Brazil of its investment-grade credit rating.

Brazil’s downgrade had long been expected following recent scandals and its slide towards recession, but it has sharpened the focus on who could be next.

Slumping commodity prices and the prospect of rising global interest rates, exacerbated in some cases by ugly national politics, are laying bare the failure by a number of countries to reform while times were good.

S&P’s Capital IQ unit has what it calls Market Derived Signal (MDS) models that show credit default swap markets are expecting a wave of EM downgrades, including some that would push the big names mentioned down into junk grade.

Russia, which only Fitch of the three main agencies still rates as investment grade (IG), assigning a BBB- rating, is currently trading as if it were at least three notches into the junk classification.

Turkey, which both Moody’s and Fitch currently have on the lowest investment grade rung, is trading as if were two steps into junk while for South Africa it is one.

Colombia, which is being hit hard by the fall in its main export oil and a rift with neighbour Venezuela, is also expected to slide back into the speculative category according to the Market Derived Signal model.

The difference between investment grade and junk status can have huge implications for countries’ borrowing costs, because global investors — especially those which invest against an index — tend to steer away from lower rated credits.

The downgrades currently being seen are partly reversing the roughly 200 upgrades emerging market borrowers have earned since 2007, nearly half of which elevated them from junk to investment-grade.

As well as those now teetering on the cusp, China, Chile, Malaysia, South Africa, Mexico, Indonesia, Thailand, Israel, Saudi Arabia and much of the Middle East are priced for rating cuts, according to the data.

Historically, though, the gloomy view of markets does not always turn into reality.

The rating firms also point out that although a clutch of heavyweight names are currently threatened with downgrades, the outlook across emerging markets credit is generally stable.

“The big markets that are most in focus are Turkey and Russia,” Sarah Carlson, Senior Vice President at Moody’s, told Reuters. “We don’t have many countries in Latin America on a negative outlook. Most are on a stable outlook.”

Ahead of its review of Turkey next week, Fitch senior director Paul Gamble said on Tuesday the country’s fiscal position, which is a key metric for its rating, had not changed as a result of its recent political turmoil.

“The fiscal strength has not wavered. We are still looking at a comfortable primary surplus at 1.5 percent of GDP,” he said.

Fitch says SA “downgrade risk is increasing”

LONDON, Sept 8 (Reuters) – Ratings agency Fitch said on Tuesday the risk of a downgrade to South Africa’s sovereign rating was increasing.

In June, Fitch confirmed its BBB rating for South Africa with a negative outlook.

“Since we put South Africa on a negative outlook in December 2014, the news flow has largely been negative,” said Carmen Altenkirch, director at Fitch Ratings speaking at a conference in London.

The only bright spot being the improvement in current account, she said.

“(However), given how much the rand has depreciated particularly against the dollar we would have expected perhaps a more significant rebound in exports,” she added. “On balance, I would think that the risk of a downgrade is increasing.”

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