Fitch downgrades SA to junk status

Fitch downgrades SA to junk status
Published: 07 April 2017 (513 Views)

Cape Town - Fitch Ratings downgraded South Africa's unsecured foreign-currency and local-currency bonds to non-investment grade - commonly known as junk status - on Friday.

It is the second rating agency to downgrade South Africa to junk status, meaning certain international investors will have to pull their investment from South Africa or else they will be in breach of their portfolio mandates. It takes two rating agencies to make a country officially junk status for these rules to kick in.

Standard & Poor's (S&P) downgraded South Africa to BB+ (junk status) on Monday evening, following President Jacob Zuma's reshuffle last Thursday, which saw the removal of Pravin Gordhan as finance minister.

While S&P's outlook was negative, Fitch retained the outlook at stable. The other rating agency - Moody's - has South Africa two notches above junk status but put the nation's sovereign rating on downgrade review this week.

"In Fitch's view, the cabinet reshuffle, which involved the replacement of the finance minister, Pravin Gordhan, and the deputy finance minister, Mcebisi Jonas, is likely to result in a change in the direction of economic policy," it said in a statement on Friday.

"The reshuffle partly reflected efforts by the out-going finance minister to improve the governance of state-owned enterprises (SOEs). The reshuffle is likely to undermine, if not reverse, progress in SOE governance, raising the risk that SOE debt could migrate onto the government's balance sheet.

"Differences over the country's expensive nuclear programme preceded the dismissal of a previous finance minister, Nhlanhla Nene, in December 2015 and in Fitch's view may have also contributed to the decision for the recent reshuffle. Under the new cabinet, including a new energy minister, the programme is likely to move relatively quickly."

Deb service costs to rise

Treasury director general Lungisa Fuzile explained this week that when two rating agencies downgrade South Africa to junk status, then 10% of South Africa's bond holders, who are part of the foreign currency denominated component, would have to sell their bonds as part of their portfolio mandate. Not selling could make them technically in breach of their mandate.

"They are given a certain amount of time … to sell the South African bonds that they are holding in their portfolio," he said. "That triggers a rise in the yield, which means the debt service cost associated with those instruments rise."

Nuclear build programme worries Fitch

Adding to Fitch's reasons for the downgrade was South Africa's nuclear programme.

Fitch said that Eskom "has already issued a request for information for nuclear suppliers and is expected to issue a request for proposals for nuclear power stations later this year.

"The treasury under its previous leadership had said that Eskom could not absorb the nuclear programme with its current approved guarantees, so the treasury will likely have to substantially increase guarantees to Eskom.

"This would increase contingent liabilities, which are already sizeable. According to the 2017/18 budget, the government's guarantee exposure to public institutions was ZAR308.3 billion at end-March 2017, up from ZAR255.8 billion a year earlier.

"The main SOEs had additional liabilities of ZAR463 billion in 2016 with no explicit guarantee but with a significant probability that the government would step in should SOEs be unable to service the debt. The government has repeatedly needed to support SOEs, including Eskom, which is responsible for a large share of liabilities."

Upward pressure on general government debt

"The new finance minister has stated that he does not intend to change fiscal policy and remains committed to expenditure ceilings that have been a pillar of fiscal consolidation," said Fitch. "However, Fitch believes that following the government reshuffle, fiscal consolidation will be less of a priority given the president's focus on "radical socioeconomic transformation".

"This means that renewed shortfalls in revenues, for example as a result of lower than expected GDP growth, are less likely to be compensated by expenditure and revenue measures. This could put upward pressure on general government debt, which at an estimated 53% of GDP at end-March 2017 was already slightly above the 'BB' category median of 51%.

"The tensions within the ANC will mean that political energy will be absorbed by efforts to maintain party unity and fend off leadership challenges and to placate rising social pressures for addressing inequality, poverty and weak public service delivery. The Treasury's ability to withstand departmental demands for increased spending may also weaken.

"Political uncertainty was already an important factor behind weak growth last year, as in Fitch's assessment it has affected the willingness of companies to invest. The agency believes that the cabinet reshuffle will further undermine the investment climate. Fitch forecasts GDP growth of 1.2% in 2017 and 2.1% in 2018, but the reshuffle has raised downside risks."

Fitch said its ratings on "South Africa's senior unsecured foreign- and local-currency bonds have been downgraded to 'BB+' from 'BBB-'. The rating on the sukuk trust certificates issued by RSA Sukuk No. 1 Trust has also been downgraded to 'BB+' from 'BBB-', in line with South Africa's Long-Term Foreign-Currency IDR.

"The short-term foreign-and local-currency IDRs (issuer defaut ratings) and the rating on the short-term local-currency securities have been downgraded to 'B' from 'F3'. The country ceiling has been revised down to 'BBB-' from 'BBB'.

"The downgrade of South Africa's long-term IDRs reflects Fitch's view that recent political events, including a major cabinet reshuffle, will weaken standards of governance and public finances.

- fin24

Tags: Junk, Fitch, Downgrade,
 0

You May Like These Videos

Comments

There are no comments.

Latest stories

ZimFirst leader promises a new Zimbabwe

by Stephen Jakes | 20 February 2018 | 227 Views

Tsvangirai FOREVER

by Itai Mushekwe | 20 February 2018 | 571 Views

Tsvangirai's son endorses Chamisa

by Stephen Jakes | 20 February 2018 | 373 Views

Dynamos, Caps to face Zambian sides

by Staff Reporter | 20 February 2018 | 118 Views

Build Zimbabwe promises to develop the nation to competitive status

by Stephen Jakes | 20 February 2018 | 75 Views

Pizza Hut launches in Zimbabwe

by Staff Reporter | 20 February 2018 | 149 Views

The New Zanu-PF has shown political maturity and tolerance

by Dr Masimba Mavaza | 20 February 2018 | 122 Views

'Late Tsvangirai forgave Mugabe'

by Staff Reporter | 20 February 2018 | 253 Views

Zimra implements new strategies

by Staff reporter | 20 February 2018 | 96 Views

Obert Mpofu Parly probe over missing $15bn postponed

by Staff reporter | 20 February 2018 | 108 Views

Govt to proclaim bonus pay dates

by Staff reporter | 20 February 2018 | 105 Views

Khupe, Mudzuri, Elizabeth shut out at Tsvangirai funeral

by Staff reporter | 20 February 2018 | 257 Views

Peter Zwide Kalanga unveiled as Ndebele King

by Staff reporter | 20 February 2018 | 148 Views

Tsvangira's Freedom Square last bow

by Staff reporter | 20 February 2018 | 68 Views

'Companies tired of bankrolling Zanu-PF'

by Staff reporter | 20 February 2018 | 92 Views

More drama at Tsvangirai send-off

by Staff reporter | 20 February 2018 | 300 Views

Domestic dispute ends in tragedy

by Staff reporter | 20 February 2018 | 87 Views

Chivayo, business partner clash

by Staff reporter | 20 February 2018 | 76 Views

Kombis banned from CBD

by Staff reporter | 20 February 2018 | 115 Views

Man kills wife's lover

by Staff reporter | 20 February 2018 | 98 Views

Mnangagwa to repossess Chipanga's Farm

by Staff reporter | 20 February 2018 | 151 Views

Mzembi freedom bid thrown out

by Staff reporter | 20 February 2018 | 56 Views

Pupil bites 14 classmates

by Staff reporter | 20 February 2018 | 51 Views

Bosso turn tables on Chicken Inn

by Staff reporter | 20 February 2018 | 37 Views

Zifa lift Peter Dube suspension

by Staff reporter | 20 February 2018 | 57 Views

Matabeleland communities seek apology over Gukurahundi atrocities

by Staff reporter | 20 February 2018 | 38 Views

Govt starts offering STEM scholarships for teachers

by Staff reporter | 20 February 2018 | 39 Views

Mnangagwa's compassionate politics good for country

by Nick Mangwana | 20 February 2018 | 103 Views

Banning second hand car imports not fully thought out

by Staff reporter | 20 February 2018 | 112 Views

Gogo Tsvangirai trending

by Staff reporter | 20 February 2018 | 149 Views

Council clears Egodini for mall project to resume

by Staff reporter | 20 February 2018 | 29 Views

Mobile network operators directed to tackle money transfer hiccups

by Staff reporter | 20 February 2018 | 59 Views

Fierce game of thrones hits Zimbabwe opposition

by Staff reporter | 20 February 2018 | 31 Views

Mugabe birthday low key event

by Staff reporter | 20 February 2018 | 198 Views

Bulawayo flash floods leave trail of destruction

by Staff reporter | 20 February 2018 | 41 Views

Govt moves to promote local motor industry

by Staff reporter | 20 February 2018 | 37 Views

Chiwenga commands political parties to observe peace

by Staff reporter | 20 February 2018 | 43 Views