S&P Junk SA’s Local Currency Rating
Global rating agency Standard & Poor’s have finally downgraded SA’s long-term local currency rating to the dreaded “Junk” Status (BB+) from their previous rating of BBB- which meant ‘non investment grade’. The rating now drops from: don’t invest here to total rubbish.
The Rand immediately took a tumble against other currencies, such as the Dollar where it lost 25 Cents down to R14.15/$
S&P have added that the Junk status rating has a ‘stable outlook’ – meaning it is likely that it will remain junk and not worsten (or improve). They say that the rating reflects their opinion of further deterioration of SA’s economic outlook and public finances. This is reflected in the recent shortfall of tax income to cover planned government spending, among other things.
S&P say that recent financial strategies have been focused on the distribution of wealth among the population and not the growth of the overall economy and national income. As a result, they say SA’s economy has stagnated and competition with other countries economic output has eroded.
Other factors like the media revelations of Gupta influence within government contracting and allegations of ‘state capture’, as well as, the lack of new jobs in the country (since 2015) and high levels of unemployment (currently at 27.7%) result in negative factors that need to be considered in giving a rating. Add to that political shinanigans like the recent troubles between the Presidency and Treasury regarding free education initiatives and the sudden resignation of the National Treasury Chief.
The Big Three
This now means that both Fitch (who previously dropped their rating to ‘junk’ status) and S&P agree on the poor nature of the economy and likely return on investment with only Moody’s holding out for now. The other rating agency that everyone pays attention to (Moody’s) has placed the country’s local currency rating on review to be downgraded but are holding back from doing so until after December when the country’s ruling party hold their elective conference to choose new leadership and perhaps even longer until February’s budget speech.
At present, SA are running short on about R40 Billion in income (through tax) to make ends meet. This will have to be urgently addressed and the Presidential Fiscal Committee (PFC) and Cabinet will soon meet to try work out where the money will come from. Either Government has to spend less or tax more. Both present serious challenges.
Poor ratings result in sell off on global indexes, as the risk of getting a return on investment becomes less and less likely. This in turn, means that government has to borrow new funds at higher and higher interest rates to make ends meet. Caught in a vicious cycle of borrowing to pay existing debt and to try grow the stagnant economy, without a solid plan to accomplish anything, will soon see debt to income ratios pass the tipping point and financial freefall and ruin follows shortly behind. Government would like to see public debt remain below 60% of the Counties GDP.