22 Nov

South Africa Awaits $7 Billion Ratings Double Jeopardy

South Africa will confront the threat of a $7 billion debt selloff this week as it awaits two concurrent judgments on its credit status.

Opinion among economists is divided as to how stark a danger that is. Fifty-six percent of respondents in a Bloomberg survey said S&P Global Ratings will reduce its assessment on rand-denominated debt to the highest non-investment grade on Friday. Moody’s Investors Service, which is scheduled to make a decision, will likely leave it unchanged, according to three-quarters of those asked.

Should both companies cut, rand debt would fall out of gauges including Citigroup Inc.’s World Government Bond Index, sparking outflows of 80 billion to 100 billion rand, Citigroup economist Gina Schoeman said. This would raise borrowing costs for the nation that’s selling more debt to plug a widening budget gap.

Conflict in the ruling party in the run-up to its leadership election next month has hamstrung efforts to bolster the Africa’s most-industrialized economy, which had its second recession in less than a decade earlier this year. Business confidence is near the lowest in more than three decades amid allegations of corruption against state companies’ managers and politicians including President Jacob Zuma.

“Given the fraught political context in which South Africa finds itself, alongside the negative repercussions of downgrades in triggering ejection from key bond indices, we believe that the rating agencies will not rush to cement decisions to downgrade this month,” said Phoenix Kalen, director for emerging-markets strategy at Societe Generale SA in London.

The sustainability of the nation’s debt will be at risk unless government presents a credible fiscal-consolidation plan in 2018, Moody’s said after the mid-term budget last month.

While the outcome of the ruling African National Congress’s elective conference next month will be of interest to ratings companies, it’s the February budget that they’ll be watching for clues on the country’s debt direction, said Annabel Bishop, the chief economist at Investec Bank Ltd.

Read more: South Africa Awaits $7 Billion Ratings Double Jeopardy


27 Oct

The Bond Market Hates the New Plan for South Africa’s Finances

South African Finance Minister Malusi Gigaba took on the bond market, and he is losing.

As investors digested Gigaba’s intention to close a yawning budget gap by flooding the domestic market with an additional 122 billion rand ($8.6 billion) of bonds over the next three years, benchmark yields soared as much as 56 basis points to 9.42 percent, the highest in 19 months. That’s already closing in on the government’s own bad-case scenario of an 80-point jump in yields – and things could get a lot worse.

The market and rating companies “will hate” an increase in the debt ceiling, rising bond issuance, the lack of spending cuts, and the widening deficit contained in the budget proposals, Investec Asset Management said in a note to clients.
Foreign investors, who hold 41 percent of the country’s 1.97 trillion rand of local-currency bonds, dumped 5.1 billion rand of the debt in the hours after Gigaba delivered his medium-term budget statement to lawmakers on Wednesday. That’s the biggest one-day outflow since September 2011, at the height of the European debt crisis — but it’s small compared to what could happen if the debt gets downgraded to junk, forcing South Africa’s exit from Citigroup Inc.’s World Government Bond Index.
That would spark outflows of as much as 200 billion rand as investors that track the index divest their holdings, according to a recent estimate by JPMorgan Chase & Co. If that happens at a time when rising rates in developed nations curb demand for emerging-market assets, yields on benchmark bonds may climb close to 11 percent and stay there, according to the worst-case scenario painted by South Africa’s National Treasury.
“A downgrade and exclusion from the WGBI seems as though it is a foregone conclusion in the market,” Reezwana Sumad, an analyst at Nedbank Group Ltd., said in a client note. In addition, “South Africa’s vulnerability to global and emerging-market risk sentiment cannot be ignored. Any turn in foreign sentiment would yield large outflows from the bond market, and consequently higher yields,” she said.
03 Jul

South Africa to unveil action plan to lift growth: Gigaba

South Africa’s Treasury will unveil an action plan on Friday detailing structural changes and timelines to boost growth to 6 percent in an economy mired in recession, Finance Minister Malusi Gigaba said on Monday.

The plan will be released after a policy conference of the ruling African National Congress (ANC) wraps up, a meeting overshadowed by a power struggle between rivals seeking to succeed President Jacob Zuma.

“We will implement steps to get the economy growing at about 6 percent and more”, Gigaba said at an event marking the launch of the tax-filing season in Africa’s most industrialised economy.

“We want to get everyone focused on boosting the economy … so that the low growth doesn’t become a vicious cycle.”

South Africa’s economy contracted 0.7 percent in the first three months of 2017 after shrinking 0.3 percent in the previous quarter, piling pressure on Zuma whose missteps, including the sacking of Gigaba’s highly-respected predecessor Pravin Gordhan in March, have corroded investor confidence.

Proposals being debated at the ANC’s conference which have unnerved investors include holding a referendum on land reform and a push for the expropriation of land without compensation and greater black ownership of businesses.

But Gigaba pointedly said the action plan would draw on issues raised by investors and ratings agencies.

South Africa’s credit rating was recently downgraded by S&P Global Ratings and Fitch to junk status.

Read more: Reuters



21 Jun

South Africa is doing everything to avoid rebuilding confidence in its economy

By any measure it has been a bad few months for the South African economy. Confidence has plummeted since the contentious firing of former finance minister Pravin Gordhan in March, followed by sovereign downgrades to ‘junk’ status by S&P and Fitch in April. By early June it had entered recession.

Driving much of this is political instability, embodied by the scandal-ridden presidency of Jacob Zuma. Amid almost daily, high profile reports of infighting South Africa’s politics has become its greatest economic liability.

Yet rather than calming concerns its leaders seem intent on deepening anxiety about the country’s political future. Meddling in the economy, far from receding, is gathering steam.

The latest row is over the independence of the central bank, following reports that the government is seeking changes to its traditional role of focusing on currency stability towards promoting growth. The rumours have already prompted warnings of further downgrades into junk territory by S&P.

The news comes as the country’s Chamber of Mines is threatening to take the government to court over proposed changes in its vast mining sector. Fitch has warned they may deter much-needed investment.

Read more : South Africa is doing everything to avoid rebuilding confidence in its economy