Live almanis market: Will Standard & Poor’s cut its credit rating on South Africa’s foreign currency bonds to junk in 2016?
Live almanis market: When will Jacob Zuma cease to be President of South Africa?
On Friday the ratings agency Standard & Poor’s announced that it would not downgrade South Africa’s sovereign debt rating to “junk” status for now, but claimed it could well do so later this year. Markets blew a sigh of relief and the BBC provided an excellent beginners guide to the situation.
“Junk” status is market shorthand for a cut in ratings by any of the three main ratings agencies into “non-investment grade”, in this case to BB+ or below (more details on ratings here). These ratings are, in many ways, just like a credit rating for an individual and affect the price at which governments can borrow.
S&P were, more specifically, threatening to cut the rating on those bonds issued by the South African government in foreign currencies. This is important because foreign investors prefer to lend dollars to governments like South Africa. The South African rand has lost over 30% of its value since the start of 2014 and lending in dollars or euros allows them to avoid such currency risk. But they also tend not to want to buy anything with a “junk” rating as many asset managers are prohibited from owning it.
South Africa has run persistent current account deficits since 2004 which it must finance by attracting foreign investment into the country, which most frequently means selling South African government debt.
With a current account deficit standing at 5.1% of GDP at end-2015, South Africa needs to attract significant amounts of foreign investment. A junk rating from S&P would be a bitter blow. It’s worth watching this space, especially as the fortunes of President Zuma may well hinge on his ability to stabilise the economy.