Junk rating will hit poor the hardest

Renewed industry concerns over South Africa’s growth prospects and international borrowing clout have resurfaced following the release of a report in which the bulk of domestic economists reiterated the likelihood of a downgrade of South Africa’s credit rating to junk status this year.

The poll of South African economic minds, conducted by Reuters, cited fears around policy uncertainty, political leadership and government missing its budget targets as a primary driver of impending downgrades by ratings trio Fitch, Moody’s and Standard & Poor’s (S&P).

Most analysts agreed that S&P, which currently rates South Africa one notch above junk, was most likely to cut its outlook and push the country into a sub-investment grade position.

Econometrix economist Azar Jammine backed his colleagues’ assertions, telling The Citizen there was “a more than 50%” chance of South Africa being downgraded to junk status by the end of the year.

While some analysts believed that the move to junk status had already been largely priced in, others cautioned that it would still force selling by certain investment groups, such as hedge funds, pension funds and asset managers, which were only mandated to hold investment-grade bonds.

Offering a brighter outlook, Finance Minister Pravin Gordhan, who last week met ratings agencies in Washington as part of the spring gathering of the International Monetary Fund (IMF), the World Bank and the G20, said investors were satisfied with the country’s ability to repay its debts and were now focused on the country’s capacity for growth.

“Growth is the big concern ratings agencies have and if we can show that leaders across the board identify our problems in a similar way and are committed to the solutions, we can make interesting progress,” IoL quoted him as saying at the time.

Speaking in New York a month earlier following meetings with investors and ratings agencies in London and Boston, Gordhan assured investors and agencies of government’s commitment to fiscal reform.

Speaking to The Citizen, economist Mike Schussler cautioned that people reliant on state grants were most likely to be negatively hit by a swing to junk status, as this would increase government’s borrowing costs and narrow the state’s social resources budget.

The ability of the state to pay for social service providers, such as teachers and social workers, would also be hampered, he said.

“A junk rating will devalue our currency, raise interest rates and increase the price of things like petrol and food.

“Obviously the poorer people will be hit harder than the richer ones.”

– natalieg@citizen.co.za