Indices show another ‘junk’ downgrade is likely

As South Africa desperately hangs onto its last above-grade credit rating to attract foreign direct investment (FDI) into its bond market as a means of funding parastatals like Eskom, indices this morning reflected that international markets were already beginning to “junk” the country’s sovereign debt.

This comes as the yield on government bonds, which inversely reacts to bond prices, has seen an unprecedented spike over the last few days, mainly because of the drop in desirability of government guarantees for foreign-funded investments.

Weariness in the rand can also be seen in the steep decline of the local currency to the US dollar since the weekend – from R13.85 to R15.30.

It marked a loss of 10.5% in little over 48 hours, making it the worst performing emerging market denomination, made worse by US pressure on China after Donald Trump’s August 1 announcement that his administration was imposing yet more tariffs on Beijing.

But for the time being all eyes are on Moody’s Investment Service, the only remaining rating agency to sustain SA’s above-junk rating of Baa3.

And although Moody’s is only meant to announce its next sovereign rating for SA in November, analysts are increasingly saying it’s only a matter of time before it joins peer agencies S&P Global and Fitch to adjust the country’s rating downward.

News that Eskom wants government to take over the lion’s share of its R440-billion debt, as it’s said to only be in a position to service R150 billion of its dues, is also expected to force Moody’s hand, possibly earlier than November.

Speaking about SA government bonds that appear to be drastically falling out of favour as the prices drop and yield grows – in an attempt to stimulate buying – Win Thin of New York FDI consultancy Brown Brothers Harriman & Co said SA’s sovereign rating was expected to fall three levels into junk.

Moody’s had been “too kind” to SA, the currency strategist said.

Should SA lose its last remaining above-grade rating, billions of mainly dollar-based investments will be withdrawn from government bonds, most likely prompting a bailout by the International Monetary Fund (IMF) of government debt.

It means that policy governing SA, to a large degree, will be set by an institution other than the government.

In such a case the IMF will most likely enforce wide-scale cost-cutting, including slashing the oversized civil service wage bill.

Unions have already warned there will be strike action on a massive scale if that happens, and in a bid to assuage fears that SA might be heading for a fiscal meltdown, Reserve Bank governor Lesetja Kganyago has said the country is safe and won’t fall into the IMF’s hands.

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