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

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