Assume brace position: SARB warns “junk” status coming, how it will hurt us

Led by reinstated Finance Minister Pravin Gordhan, Team South Africa tried its best during he recent roadshow to global investors in London, Boston and New York. But we now know that while the show of unity, flag-coloured scarves and promises of a better future might have postponed things, the prevent-junk-status effort hasn’t stopped the inevitable. Capital is unemotional, moves fast and has the whole world to choose from. South Africa’s Reserve Bank Governor is under no illusions. Yesterday he told the country to brace itself for a credit downgrade – and the consequences of capital outflows, higher interest rates and tighter credit that is sure to follow. Despite the efforts of Gordhan and two dozen private sector CEOs who accompanied him, reversing a long-established tide takes time and requires tough corrective action. Sometimes just knowing what needs to be done is not enough. Only once the pain passes the comfort threshold is action triggered. And SA doesn’t seem to be there just yet. – Alec Hogg          

By Renee Bonorchis

(Bloomberg) — There is a medium to high probability that South Africa’s debt will be downgraded to non-investment status, according to the country’s central bank.

A cut may lead to capital outflows, affect the government’s rand-denominated debt, increase the cost of funding and reduce credit to the private sector, the Pretoria-based South African Reserve Bank said in its Financial Stability Review on Tuesday. Spreads on credit-default swaps would also widen, corporate profits decline and household debt levels would increase along with financing costs, the central bank said.

Governor of the South African Reserve Bank Lesetja Kganyago
SARB Governor Lesetja Kganyago

South Africa risks losing its investment-grade status, with S&P Global Ratings due to review its BBB- assessment, which is one level above junk, in June. Moody’s Investors Service put its assessment, which is one step higher, on review for a downgrade in March. Finance Minister Pravin Gordhan met with rating companies during the International Monetary Fund spring meetings in Washington last month.

“You don’t prevent a downgrade just by talking to ratings agencies,” Governor Lesetja Kganyago said after the release of the report. “A downgrade is prevented by improving your credit metrics.”

Gordhan projected in his February budget the fiscal shortfall will narrow to 2.4 percent of gross domestic product in three years from a projected 3.9 percent this year. Gross debt will rise to more than 50 percent of gross domestic product for the first time in at least 25 years, according to the Budget Review.

Read also: More pain? Inflation surprising SARB, could peak at 8.1% in December – Montalto

Credit Strength

“Fiscal consolidation will arrest any deterioration in our debt metrics,” Kganyago said. South Africa’s ability to service domestic debt is “much stronger than we are communicating or give ourselves credit for.”

The rand, which dropped 2.6 percent on Tuesday, weakened 0.2 percent to 14.6717 per dollar as of 7:38 a.m. in Johannesburg. Yields on rand-denominated government bonds due December 2026 rose 1 basis points to 9.13 percent, adding to Tuesday’s 14 basis-point increase.

Despite the risk of a credit-rating downgrade, South Africa’s biggest banks have undergone common-scenario stress tests and could withstand significant credit losses, according to the central bank.

Other risks for the country’s largest lenders, which include Standard Bank Group Ltd. and FirstRand Ltd., include “spillovers from excessive volatility and risk aversion in global financial markets” and continued low economic growth in South Africa, the central bank said. “Despite some serious headwinds, the financial system is assessed as remaining robust, characterized by well-capitalized, liquid and profitable financial institutions.”