Tag: junk

What can SA sell?

A Cabinet committee has changed its tune regarding a plan to sell its full R13-billion stake in Telkom to fund the recapitalisation of South African Airways (SAA) and the SA Post Office, it was revealed at the mini budget last Wednesday.

By selling state-owned assets, Treasury aims to avoid breaching its expenditure ceiling by R3.9bn. This comes after its decision to bail out SAA with a R10bn appropriation and R3.7bn recapitalisation of the Post Office.

The change in tune follows Cabinet’s realisation that the opportunity cost of losing its 39.75% stake in Telkom would be too great.

Now, Cabinet is looking at selling departmental assets and expects a cash windfall from its release of 2.6MHz broadband frequency.

Treasury director general Dondo Mogajane told media on Wednesday that they can’t simply ditch all their Telkom assets. “Telkom is a well-performing share, contributing R900m to R1bn in dividends every year,” he said. “It is important that we hold on to that as much as we can.”

Later, Finance Minister Malusi Gigaba revealed in his mini budget speech that government has “decided to dispose of a portion of government’s Telkom shares, with an option to buy them back at a later stage”.

Hang on to Telkom

In an interview with Fin24 following the speech, Mogajane said government owns many assets which are not being used, which can be sold to limit the amount of Telkom shares they sell.

“We are currently looking throughout the whole of government,” he said. “We are engaging with Public Works, we are engaging with the Department of Rural Development in terms of assets that we have.

“Once we have identified all of those, we will make recommendations to the (Cabinet) committee, which will make these hard decisions to sell based on the quantum of what’s needed.”

This Cabinet committee comprises Gigaba, Economic Development Minister Ebrahim Patel, Public Enterprises Minister Lynne Brown, Telecommunications Minister Siyabonga Cwele and Science and Technology Minister Naledi Pandor.

“Our ceiling, as the books indicate, will be breached by R3.9bn, so we will be looking for assets that will clear that by March 31, so that we remain within the ceiling, even for the current year,” said Mogajane.

“For the MTF (medium-term fiscus), we have confirmed that we will not breach the ceiling and that is the commitment we have made.”

Regarding the release of broadband frequency, Treasury said in its mini budget that “the bulk of additional spectrum is ready to be allocated immediately, without requiring the migration of existing spectrum users to digital television”.

“The delay in allocating telecommunications spectrum constrains growth across the economy. Lack of radio frequency limits the ability of businesses to deploy new technologies and contributes to the high cost of broadband,” it said.

“A well-designed spectrum auction can promote transformation and improve competition as new participants enter the market.

“Universal service conditions can improve access for low-income households. And a competitive auction can sharply reduce data costs.”

By Matthew le Cordeur for Fin24

Motorists one of junk’s first victims

A fuel price increase will be the first major expense to hit South Africans as a result of a weaker rand‚ the Automobile Association of SA (AA) has warned.

The AA’s mid-month data forecasts that petrol will rise 55c a litre in May‚ while diesel will cost about 30c a litre more. Illuminating paraffin will cost an estimated 41c a litre extra.

The fuel-hike predictions are based on unaudited mid-month fuel price data released by the Central Energy Fund.

“The loss of confidence by investors and the sovereign ratings downgrades by ratings agencies Fitch and S&P‚ have led to the rand slipping against the US dollar‚ down from around R12.35 at the beginning of the month to its current position of around R13.40‚” said the AA’s Layton Beard.

The AA said the rand’s weakness largely contributed to the expected fuel price increase‚ with hikes in international petroleum prices accounting for the balance.

“However, there is no certainty that the impact of the downgrades has been fully priced into the economy. The picture for May could be substantially different‚” Beard said.

By Suthentira Govender for www.businesslive.co.za

Fraud, dishonesty on the up as economy faulters

First Standard & Poor, now Fitch have rated the South African economy “junk” with huge ramifications for South African citizens, with the poorest of the poor being the worst affected, economists agree.
Manie van Schalkwyk, executive director, of the South African Fraud Prevention unit said there would be much less money going around, a severe lack of international investment and potential job losses.

Continue reading

The seven year ditch: climbing out of junk

While it is well documented that junk status has a number of dire consequences for both South Africa, and its people, more important is to consider how long the country can expect to be stuck with a junk rating say Lullu Krugel and Christie Viljoen, economists at KPMG.

On Monday, ratings agency S&P Global lowered South Africa’s sovereign debt to below investment grade, with Fitch and Moody’s likely to follow.

Hours after S&P announced that it would be downgrading South Africa to junk status, Moody’s confirmed that it would also be placing the country on review for downgrade, though the group has now delayed its report for at least 30 days as it assesses the country.

Economists have warned that the downgrade to junk is likely to trigger a recession as its effects spread to the wider economy.

“The downgrade greatly complicates the prospects for South Africa being able to stage an economic recovery. Without a growth recovery, employment growth and revenue collection will stagnate and may even decline,” said CEO of the South African Institute of Race Relations, Frans Cronje.

Research by KPMG into the sovereign ratings assigned by the three largest rating agencies – S&P, Fitch Ratings and Moody’s Investors Service – over the past three decades indicates that 15 countries have seen their investment-grade ratings revoked but were then able – over time – to regain this status.

These countries include Colombia, Croatia, Hungary, Iceland, India (twice), Indonesia, Ireland, Korea Republic, Latvia, Romania, Slovakia, Slovenia, Thailand, Turkey and Uruguay.

Of these countries, Krugel and Viljoen noted that the rating downgrades were broadly grouped into four categories:

Economic deterioration (Colombia, Hungary, India, Latvia and Romania);
Unsustainable macroeconomic imbalances (India, Slovakia and Slovenia);
A domestic currency, financial or banking crisis (Croatia, Iceland, Ireland, Thailand, Turkey and Uruguay); and
A currency, financial or banking crisis resulting directly from neighbouring or regional influences (Indonesia and the Korea Republic).
“These countries’ diverse experiences show that it takes, on average, seven years to again graduate to the investment-grade club.”

The economists said that countries like Croatia, Iceland, Ireland, Korea Republic, Latvia and Slovenia were able to do so in three years or less. At the opposite end of the spectrum, and depending on which rating agency was involved, there were instances where it took Colombia, India, Indonesia, Turkey and Uruguay more than a decade.

Strategies used to return to investment-grade

In addition to an analysis of why countries had historically been downgraded to junk, Krugel and Viljoen also released a report detailing how these countries typically managed to return to an investment-grade rating.

“Strategies and narratives on countries that recovered their investment-grade ratings are broadly grouped into six categories,” noted the duo.

These include:

Fiscal consolidation and/or austerity (Hungary, Ireland, Latvia, Romania and Slovenia);
Significant economic and political reforms (Colombia, India, Indonesia, Turkey and Uruguay);
Declining external and fiscal vulnerabilities (India and Thailand);
Debt restructuring and economic policy reform (Korea Republic);
Privatisation of the sovereign’s holdings in private/semi-state companies (Croatia); and
Active intervention by a newly elected government (Iceland and Slovakia).

South Africa
South Africa is most closely associated with the countries experiencing economic deterioration and, possibly, those having unsustainable macroeconomic imbalances, said Krugel and Viljoen.

“On the issue of how South Africa will be able to return to its former investment-grade rating, the key element in a recovery process is that admission that a problem exists and that work is needed to rectify this,” Krugel and Viljoen said.

However the economists noted that following the downgrade announcement by S&P, the National Treasury appeared far from concerned with the development

“The commitment to fiscal consolidation was reiterated, coupled with a rebuttal that South Africa is committed to a predictable and consistent policy framework and that open debate on policy matters should not be a cause for concern.”

Junk status no big deal: Zuma

President Jacob Zuma says that South Africans highly politicise the rating agencies, making them out to be a bigger issue than other countries.

Zuma was responding to questions from MPs in Parliament on last Wednesday.

Moody’s and Standard & Poor’s (S&P) will release their credit ratings reviews on 25 November and 2 December respectively, while Fitch is expected to follow suite in the near future, although no calendar dates have been provided yet.

President Zuma said that the government has worked very hard to grow the economy under very difficult conditions of ‘global meltdown’.

He said that the government has worked with the agencies who grade the country.

“What is funny here, is that South Africans highly politicise the rating agencies”. He suggested that when other countries are downgraded it is hardly ever spoken about.

He cited countries including France, Russia, Turkey, the UK, Brazil, China and the US as countries who have been downgraded over the past five years.

“You have never heard, but in South Africa, even if they have not arrived, its a big issue. We are politicising downgrading – that is our problem,” Zuma said.

He said that agencies have been to South Africa and they will take their decision, as they have been taking their decisions to all other countries.

“The point I am making,” Zuma said, “is that we here tend to politicise things and therefore create a very big hype when this is not an issue to other people.”

He said to the house that many would probably be hearing for the first time that other countries are in junk status. “It was not a big issue,” he said.

“Reviews by rating agencies are important for the country, they form part of many monitoring mechanisms that encourage us to improve governance in both the public and private sector,” Zuma said earlier in the session.

Asked by the DA’s David Maynier, what his views are that a credit rating agency be set up which would be more sympathetic to the needs of Brics nations, Zuma said “there’s nothing wrong with that”.

“There are views and there are views on the economy,” Zuma said. “There’s not one view. Western countries or whatever part of the world – they all have assumptions. [The] Brics (countries) look at the world in a particular way and do their own approach to ratings.”

Current rating

Moody’s investment grade of South Africa is at Baa2 for local and foreign currencies with a negative outlook. The rating is two notches above sub-investment (also referred to as junk) grade.

S&P has South Africa’s credit rating assigned as BBB+ (local currency) and BBB- (foreign currency) – one level above junk status with a negative outlook.

Fitch rates South Africa at BBB (local currency) and BBB- (foreign currency) – also one notch above sub-investment grade, but with a stable outlook.

Source: www.businesstech.co.za

Downgrade could strengthen the rand

The rand would be volatile but may strengthen if credit ratings agencies downgrade South Africa to junk status at year-end, says economist Dawie Roodt.

Credit ratings downgrades by the likes of Moody’s, Standard & Poor’s and Fitch loom large for South Africa amid a struggling economy.

Last Thursday, the South African Reserve Bank (Sarb) Monetary Policy Committee (MPC) left interests rate unchanged at 7% but it cut the country’s 2016 growth forecast to 0%.

Economic growth, fiscal debt levels and political stability are variables that ratings agencies look at. But South Africa is struggling in all these areas, Roodt told Fin24.

Subsequently, South Africa’s luck could be up by year-end after the country narrowly dodged ratings downgrades to non-investment grade earlier this year, says Roodt.

“Based on these three variables, I think chances are very good that we’re going to see a downgrade,” Roodt told Fin24.

“Ironically, I think a downgrade will probably lead to an appreciating currency,” he adds.

The rand this year has already strengthened 8% against the US dollar after losing 26% of its value against the greenback in 2015.

While a downgrade could at first lead to a run on the rand, speculators may then eye a buying opportunity for what Roodt says is an “undervalued” currency.

“We have a very, very attractive and very well regulated and liquid financial market, especially the bond market,” Roodt told Fin24.

“So, if you get a downgrade, then institutional investors will probably take the money out of South Africa which will lead to a compression in the currency.

“But immediately the speculators are going to say listen, we’ve got a cheap currency, we’ve got very attractive yields in South Africa – let’s give it a go,” says Roodt.

While the rand could strengthen, the currency may also embark on a wild ride post downgrade.

“So, what we’re probably going to see is a stronger currency after the downgrade – not immediately – but soon afterwards. A stronger currency, but a much more volatile currency,” Roodt told Fin24.

The next round of ratings reviews for South Africa are expected to occur in December this year.

In June, ratings agency Fitch affirmed South Africa’s investment grade credit one notch above junk, but it warned that political and growth concerns should be addressed.

This followed rating reviews by Moody’s in May which affirmed South Africa’s ratings at Baa2/P-2 and assigned a negative outlook. Standard & Poor’s in June also affirmed its BBB- level with a negative outlook for South Africa.

Stats SA announced in June that South Africa recorded a negative growth rate of -1.2% in the first quarter of 2016, sparking fears of an impending recession.

By Gareth van Zyl for Fin24

SA teeters on the brink of junk

One more cut from S&P Global Ratings will see SA join the ranks of its junk-rated peers.

S&P, whose decision on the country’s sovereign credit rating is due late on Friday, has made no secret of the fact that, to hold off, the agency needs to be convinced that the steps taken by the government to rein in debt and reform the structure of the economy would pave the way for SA’s growth rate to recover.

Although the week ahead will feature plenty of data releases, these will be overshadowed by S&P’s decision.

S&P has ranked SA’s foreign-denominated debt at BBB-, the bottom rung of the investment-grade ladder, with a negative outlook. Konrad Reuss, S&P’s MD for sub-Saharan Africa, told the Financial Mail recently that a downgrade was “a real possibility”, although it was difficult to say whether this would happen in June or December.

S&P is concerned about the country’s “very lacklustre” reform agenda and the danger that political events will slow progress.

A downgrade to speculative grade or junk status (BB+) would be a vote of no confidence.

In December 2015, S&P changed its outlook on SA to negative. Since then, the country’s gross domestic product (GDP) outlook had deteriorated, says Citi Bank economist Gina Schoeman.

There had also been little hard evidence of policy reform.

As a result, S&P would be “easily justified” in downgrading SA this week, Schoeman says.

However, in the past six months, the prospect of a downgrade had become far closer to call because of SA’s recent display of institutional strength. She singled out the judiciary, the Reserve Bank and the Treasury.

S&P might also wait until the mini-budget in October to allow more time for fiscal and GDP data to emerge, she says.

These are some of the reasons Moody’s did not downgrade SA earlier in May.

“Methodologies differ, however, and S&P may well have lost patience with the wait-and-see approach,” Schoeman says.

“This keeps the risk of a 3 June sub-investment grade foreign currency rating alive.”

In the run-up to the decision, the markets will have private sector credit extension data, as well as the country’s trade and budget balances to digest on Tuesday.

BNP Paribas Securities economist Jeff Schultz expects headline credit extension to have slowed to 8,7% year-on-year in April, from 8,9% in March.

The bigger releases of the week include the manufacturing purchasing managers’ index (PMI) on Wednesday and whole-economy PMI on Friday.

The manufacturing PMI will be the most interesting after its surprise spike up to a healthy 54.9 index points in April. Many economists do not expect the rise to be sustained, however.

By Claire Bisseker for www.bdlive.co.za

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