South Africa junk spiral may deepen as S&P likely to cut outlook

South Africa - junk Source: Google Images

South Africa could move deeper into junk territory as the nation looks set to lose the only stable outlook on its credit ratings this week.

Of the 22 economists in a Bloomberg survey, 16 expect S&P Global Ratings to change its outlook on the country’s credit rating to negative on Friday. That means the next move from the company, which already assesses South Africa’s foreign-currency debt at two levels below investment grade, could be a further downgrade. 
This follows after Moody’s Investors Service, which still assesses South Africa as investment grade, changed the outlook on its rating to negative two weeks ago after Finance Minister Tito Mboweni described a rapidly deteriorating fiscal outlook due to billions of dollars in bailouts for cash-strapped power producer Eskom Holdings SOC Ltd. in his medium-term budget statement.
S&P warned in its most recent assessment in May that continued fiscal deterioration, structurally weaker economic performance and mounting external financing pressures could prompt it to lower the nation’s credit assessment. It was the first major ratings company to cut South Africa to junk in 2017 after former President Jacob Zuma replaced the finance minister with a little known lawmaker in a late-night cabinet shake-up and currently has a BB reading.
“That’s not the end of the ratings scale,” said Sanisha Packirisamy, an economist at Momentum Investments. “If we continue to see further deterioration in the fiscal metrics and debt continues to track higher and there’s no sign of it stabilizing in the medium, it becomes a real threat to ratings.”
A further downgrade means it will take the country even longer to regain its investment grade status at S&P. It will also leave Moody’s investment grade rating more out of kilter with S&P and Fitch Ratings.
In its outlook change on Nov.1, Moody’s warned that keeping the current credit rating will require “a credible fiscal strategy to contain the rise in debt” in the February budget. Economists are skeptical that a downgrade can be avoided.
In a Bloomberg survey, 86% of economists said Moody’s will take South Africa to junk next year, compared with 27% who said in a survey before the mid-term budget that the country will be sub-investment grade by the end of 2020. more than half of those who now say the country will be sub-investment grade with Moody’s in 2020 forecast it will happen within the first six months.
A Moody’s downgrade would force South Africa out of the FTSE World Government Bond Index, which could prompt a sell off and outflows of as much as $15 billion, according to Bank of New York Mellon Corp. It will also raise borrowing costs and make it even more difficult for government to finance the budget.
“The agency has so far demonstrated an incredible, and frankly quite unjustifiable, reluctance to cutting South Africa’s ratings to junk,” said Cristian Maggio, head of emerging-market strategy at TD Securities. “Confronted with a horrendous revision of all fiscal targets now, and in the absence of any significant positive revisions, Moody’s will haven no option but to align with S&P and Fitch and cut the ratings”