The junk status cry around South Africa is almost fake news

5 Apr 2017

PBM
South Africa has not yet hit the sovereign credit rating junk zone despite all the news reports and social media hullabaloo that have been crying junk since that Black Monday. BBB- is not junk.
The Standard & Poors (S&P) downgrade that has triggered all this noise does not necessarily equate to junk status as translated from their official language.

 

The concerned S&P statement said the rating agency is “lowering (South Africa’s) foreign currency sovereign credit rating on the Republic of South Africa to ‘BB+’ from ‘BBB-‘ and the long-term local currency rating to ‘BBB-‘ from ‘BBB’.”
S&P justified their action by saying that “In our opinion, the executive changes initiated by President (Jacob) Zuma have put at risk fiscal and growth outcomes.
We assess that contingent liabilities to the state are rising.”

And the rating comes with a negative outlook which reflects a “view that political risks will remain elevated this year, and that policy shifts are likely, which could undermine fiscal and economic growth outcomes more than we currently project.”

 

The S&P statement was evidently strong and significant but it does not equate to junk status, even when translating those technical terms into common language. And the portion of the downgrading that translates to sub-investment is not significant, accounting for only 10% of South Africa’s debt.
BB+ which was assigned for South Africa’s foreign currency rating is considered junk. But this impacts on foreign currency denominated debt which account for about 10% of South Africa’s sovereign debt.
90% of South Africa’s debt is rand (local currency denominated). S&P has assigned a ‘BBB-‘ from ‘BBB’ rating for local currency rating. BBB- is not a sub-investment rating. It is not junk. Sub-investment rating begins at BB.

 

And there is also the fact that a sub-investment rating from one credit rating agency is not enough to equate to junk status.
A good explanation was issued by Adrian Saville, visiting Professor of Economics and Finance at Gordon Institute of Business Science, University. He notes that “At least two rating agencies must agree on sub-investment grade status and the rating must apply to local currency debt for a country to be ejected from the key global government bond index.”
Adds Saville “The sub-investment status attributed to South Africa immediately after the S&P call means that only one agency has rated the country sub-investment grade and this is on foreign currency debt.
This is not to say that the other shoe won’t fall. As things stand, it seems that is only a matter of time before the other agencies join S&P and that the call also extends to include local currency debt.”

 

Rating definition published by S&P in its website are also helpful.
The table of definitions reveals that the BBB is three notches away from the top rating of AAA which is followed by AA and then A. And BBB is 7 notches higher than the worst S&P rating of D.

BBB which is assigned to South Africa’s local currency is described as follows:
“An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.”

 

BB which is assigned to South Africa’s foreign currency is describes as follows:
“An obligation rated ‘BB’ is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.”
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