Written by: Lynn Prins
Despite rating agency Standard & Poor’s (S&P) announcement on the country’s credit rating, Finance Minister Pravin Gordhan is still adamant that South Africa will avoid a downgrade.
“I think we’ve done enough to pass the June hurdle,” he said in an interview with Bloomberg TV in Paris on Wednesday 1 June.
Gordhan, however, said that in the next six months more needs to be done, particularly in terms of implementing what’s been decided on.
According to economists, South Africa will avoid a downgrade to junk status until at least the end of the year.
However, the country is currently one notch above the sub-investment (junk status) status and according to S&P and Fitch, both rate South African debt one level above junk.
S&P, which is said to have a negative outlook on its BBB- assessment, is due to announce whether it will downgrade the rating today, while Fitch hasn’t said when it will announce the outcome of its review.
Twelve of 13 economists and analysts surveyed by Bloomberg in April said they expected S&P to lower the rating to non-investment grade by the end of this year, with four expecting the downgrade to BB+ to happen this week.
Should the outcome be as expected, South Africa will then be on par with Turkey and Indonesia.
“We are at a big risk of being downgraded,” Thabi Leoka, an economist at Argon Asset Management, told Bloomberg on Thursday. “I think it’s a 50/50 probability.”
If the rating is cut “there could be a bit of a shock,” said Malcolm Charles, a portfolio manager at Investec Asset Management.
Charles also believes there will be a negative reaction from bonds, equities and the currency come Monday morning.
“It’ll be quite a nasty start to the week”, he added.
A junk rating will increase SA’s overseas borrowing costs for companies as well as the state, reduce the country’s attractiveness to foreign and domestic investors, and further weaken the rand.
It is said that about 10 percent of government debt is foreign debt.
However, on the upside if a downgrade is to be avoided the rand could be back at R15.30 per dollar.