Published: Fri, April 07, 2017
Economy | By Melissa Porter

Fitch may be next to slap South Africa with 'junk' rating

Fitch may be next to slap South Africa with 'junk' rating

Moody's later placed South Africa on review for downgrade.

"Although the decision by S&P to downgrade South Africa's credit rating on Monday saw the country lose its investment-grade status from the agency for the first time since 2000, we think the move makes little difference to the outlook for its dollar bonds", says Oliver Jones at Capital Economics.

Ratings agency Fitch is likely to follow rival S&P and cut South Africa's sovereign credit rating to below investment-grade, analysts said, an outcome that would underscore worries about political uncertainty and prompt a further selloff in assets.

On 30 March, the President of South Africa announced wide-ranging changes to the country's government, changing top leadership in 10 ministries, including in key portfolios such as finance and energy.

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There are expectations that the country may approach global debt markets this year.

The country's long-term local-currency bond and bank deposit country ceiling remain unchanged at A1.

The requirement is that a country needs to have outstanding debt with a market capitalisation of US$50 billion, be rated investment grade by two ratings agencies and have open markets easily accessible by foreign investors. This Tuesday's auction will be more closely watched than usual as it comes in the wake of S&P Global Ratings cutting SA's foreign currency-denominated bond rating to junk on Monday evening.

South Africa is included in a few indices (see the figure above) with a different weighting in each. If this rise is substantially high, then it may force the country to rethink bond issuance in foreign currency.

Sygnia Group representative, Magda Wierzycka explained: "There is a credit rating downgrade where basically the debt of the bonds issued by the government are rated as riskier than they were yesterday".

However, several aspects of the government's reform programme remain outstanding, particularly in completing the legislative and administrative framework governing the mining sector, product market competition, in the labour market, in relation to the development of the private sector, and in encouraging a more even distribution of wealth.

"The problem has just started in South Africa - there was a lot of complacency on the ratings shift", said Salman Ahmed, chief global strategist at Lombard Odier.

Cosatu's Bheki Ntshalintshali expressed disapproval in the reason given by S&P to downgrade the country. The short- to medium-term impacts could prove painful.

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