S&P call 'will keep SA debt sexy'

04 December 2016 - 16:05 By ASHA SPECKMAN
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S&P warned that it could lower the rating, if, for example, South Africa entered a recession next year or wealth levels continued to decline in US dollar terms

Government debt will remain attractive to investors and should not be affected by S&P Global Ratings' decision on Friday to lower the long-term local currency rating on South Africa to BBB from BBB+, National Treasury director-general Lungisa Fuzile said shortly after the announcement was made.

The rand firmed more than 2% to R13.78 against the dollar after the announcement.

The country dodged a ratings downgrade for the third time this year on Friday when S&P, the most critical of the three major international credit ratings agencies, affirmed South Africa's foreign currency BBB- rating - one notch above junk status - and kept the outlook at negative.

But it warned that it could lower the rating, if, for example, South Africa entered a recession next year or wealth levels continued to decline in US dollar terms. "We could also lower the ratings if we believed that institutions had become weaker due to political interference affecting the government's policy framework," it said. Other factors the agency will continue to monitor are net general government debt and contingent liabilities related to financially weak state-owned enterprises.

However, the outlook could be revised upwards to stable if policy implementation led to improved business confidence and growing private sector investment, and ultimately to higher GDP growth and improving fiscal dynamics, S&P said.

Fuzile said the decision was an important milestone for all South Africans as government ratings were used by many creditors as reference points for determining the interest rate charge when lending in an economy.

A downgrade would increase interest costs and erode the value of fixed-income instruments. The higher cost of borrowing could throttle investment, kill growth and jobs. "So it is a reason to celebrate when we remain firmly an investment-grade country," Fuzile said.

But S&P said it had lowered the long-term local currency rating "because fiscal financing needs are increasing beyond our previous base-case expectations". It remains two notches above junk.

Most of South Africa's debt is denominated in rands and only 10% in foreign currency - a factor Fitch Ratings noted as a positive in its ratings report published last week.

S&P said that while it was lowering the long-term local currency rating, it affirmed the short-term currency rating and both long-term and short-term foreign currency debt ratings.

Fuzile said: "I say it reluctantly and tongue-in-cheek: I think that S&P may have got this wrong in so far as the local currency rating is concerned. We have pools of savings in this country ... when it matters [people] will pick up the debt." During the recession in 2008-09 when South Africa was running a deficit of 6% it was able to obtain funding from the local market at "reasonably good rates", he added.

"There will always be someone who wants our bonds for as long as we are clear about the fiscal trajectory, economic trajectory, and none of those have been questioned."

Colin Coleman, MD of Goldman Sachs SA, said the outcome was the fruit of concrete steps that business, the government and labour had taken to improve economic growth. Goldman Sachs' economic department has forecast above-consensus growth of 1.7% for 2017, from 0.5% predicted for this year.

In a joint statement business leaders said the recent ratings actions and opinions were testament to the significant benefit for South Africa's long-term growth that will be coming from the responsible management of the country's budget and the diligent commitment to fiscal consolidation.

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