SA breathes again as junk status rating sidestepped

South Africa can breathe a sigh of relief after receiving a reprieve from credit rating agency Standard & Poor’s Global Ratings late yesterday.

The agency held the country’s foreign currency sovereign credit rating at BBB-, the lowest investment-grade rating, and kept its outlook negative.

It was the last of the big three agencies to make an announcement in this round of rating reviews, and was the most important as it was the only agency that had the foreign currency rating one notch above junk with a negative outlook – meaning it was the most likely to downgrade South Africa to junk.

Analysts had said the decision on the rating was too close to call.

A week ago Fitch kept its BBB- rating on South Africa, but changed its outlook from stable to negative.

Moody’s issued a research report instead of a rating decision – in effect maintaining the rating at two notches above junk with a negative outlook.

But it issued a warning to the country to address its politics.

While the local currency rating was not viewed as the most critical of S&Ps decisions, it was, however, significant as it impacts on rand-denominated bonds that the government issues in the domestic market, about a third of which are owned by foreign investors.

Downgrades to this rating could affect capital flows to South Africa, particularly since the country’s domestic bonds are included in a key international bond index. But in S&P’s case the local rating is still in the investment-grade tier.

The decision on the foreign currency rating means South Africa has again narrowly escaped being relegated to the sub-investment grade zone.

A downgrade to junk status is a potential catastrophe, as it would oblige many fund managers to pull their funds, while setting off a downward economic spiral, block much-needed investment and make it more expensive for the government to borrow money.

Before the S&P announcement, Derick Pape, managing director of Bay wool traders Modiano SA, bemoaned the current ratings woes, saying any negative adjustment by the agencies would heavily affect his company – which, as an exporter to China and Europe, traded in dollars.

“If we don’t get downgraded to junk status, it will be good news,” he said. “Due to the nature of our business we spend an enormous amount of money on a weekly basis.

“The banks have been very good to us, but a downgrade would have serious impacts on borrowing and cash flow, which is a critical part of the business,” he said, adding that S&Ps retention of its current ratings would be a relief. Debt Rescue chief executive Neil Roets, who has been outspoken on this year’s ratings reviews, said it had been anticipated, in light of Moody’s and Fitch’s reviews, that S&P would not downgrade the country.

While welcoming the S&P reprieve, Roets said:. “This certainly does not mean we are in the clear and that we are on the right track. If anyone thought 2016 was bad, wait for 2017.

“Next year will be tough and the country cannot afford any downgrade. [It] needs to earnestly take this opportunity to get things back on track.”

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