By Johan Coetzee. Financial Consultant, Ecsponent Financial Services
It is almost certain that South Africa’s government debt will be downgraded further in November and that full junk status will last for at least the next six years.
The writing is on the wall after the Minister of Finance, Malusi Gigaba, made no bones about the dire state of our economy in his maiden mid-term budget speech.
Gigaba met with credit rating agencies immediately after delivering his speech and will be meeting them again in coming weeks. Analysts predict, however, that the die is for a full downgrading within weeks.
Rating agencies assess the government’s ability to honour debt commitments. A downgrade means South Africa is considered to be high-risk and the country will no longer receive favourable interest rates when borrowing from abroad.
This means the cost of foreign debt will rise for South Africa, placing us in a critical position where existing foreign debt of about R50 billion will have to be negotiated at much higher loan rates.
Standard & Poor’s and Fitch have already downgraded SA’s foreign debt to junk status and Moody’s seems to be the next. Standard & Poor’s and Fitch, however, can further downgrade South Africa, which means it will be significantly harder to recover the investment status.
The only thing we can do now is to reduce the damage to the economy, by meeting the rating agencies’ requirements as soon as possible.
The private sector has already begun to experience the negative effects of the downgrading, and companies such as Pioneer Foods have announced that major international transactions have been cancelled, owing to our downgrading and high government debt.
Our economy is clearly a victim of the political strife which will intensify during the next few months, adding more fuel to the fire of rating agencies.
The downgrading may lead to a reversal of capital flow, which may weaken the rand and may require the Reserve Bank to raise interest rates.
The major concern is that South Africa will be removed from the Citi Group global bond index, which will cause major capital outflow and the weakening of the rand.
Downgrading will also make it more difficult for state institutions to borrow money abroad for local infrastructure projects.
How long will this nightmare last? Over the past thirty years, fifteen countries have been downgraded to junk status. On average, it took seven years for these countries to regain investment status. Some countries surfaced much sooner, like Croatia and Latvia who recovered within three years. Others took much longer, like India, Turkey and Uruguay who took more than a decade. Analysts predict it will take South Africa six or more years to recover and regain its investment-grade rating.