LONDON – South Africa’s potential demotion to ‘junk’ credit status, a crunch review of France in April and the risks posed by Britain’s ‘Brexit’ vote top the list of dates to mark on the 2016 credit rating calendar.
European Union rules introduced a couple of years ago require Standard and Poor’s, Moody’s, Fitch and other ratings agencies to publish the review dates of any country they monitor from Europe, which tends to include much of Africa.
Ratings matter because many investors steer clear of debt judged to be non-investment grade or ‘junk’, and concerns are growing that South Africa could follow Russia and Brazil, which both lost their investment grades this year.
S&P and Fitch each have South Africa just one cut away from junk at BBB- and S&P has it on a negative outlook, meaning the chances are skewed towards a downgrade.
S&P’s first review date is June 3 and obvious concerns include weak demand for South Africa’s commodity exports, chronic power shortages and this month’s sacking of a finance minister whom investors respected.
“We could lower the ratings if GDP (gross domestic product) growth does not improve in line with our current expectations, or if state-owned enterprises require higher government support than we currently expect,” S&P said, also noting South Africa’s high exposure to China’s slowing economy.
In Europe, Spain will start 2016 with an uneasy search for a coalition government. Fitch’s review of its BBB+ stable grade on Jan. 29 will be one of first big tests of the year, followed by Moody’s, which has a positive outlook, on Feb. 19.
Uncertainty over Portugal’s new government and its vow to ease off on the austerity adopted with its EU/IMF bailout is also raising rating questions.
DBRS, a smaller agency, will have key reviews on April 29 and Oct. 21.
Its BBB (low) is equivalent to BBB- and provides Portugal’s sole insurance that its bonds can be used to maximum value to get ultra-cheap ECB funding. Without that, Portuguese banks would face holes in their finances.
“We are fairly sanguine on Portugal at the moment,” Fergus McCormick, head of sovereign ratings for DBRS, said. “The coalition is fragile, but the outlook for meeting the fiscal targets appears to be fairly reassuring.”
Two of Europe’s biggest economies are also likely to face scrutiny.
S&P has had France’s AA rating on a negative outlook for well over a year and should make a decision either way on April 22 or Oct. 21.
Britain is expected to vote sometime in the second half of the year on whether it wants to become the first country to quit the European Union.
S&P has said it could make a double cut to its UK rating if ‘Brexit’ happens and proves ugly, while other agencies have warned about the signal it would send about Europe’s fraying relations.
“Brexit is probably the biggest risk facing Europe next year,” DBRS’s McCormick said.
Among those looking to climb the rating ladder, Hungary and Indonesia are knocking on the door of investment grade, India is on the rise and Russia’s economy appears to be stabilising.
Nevertheless the agencies say there are likely to be more downgrades than upgrades in 2016.
“Who are we looking at for next year? France negative outlook, Turkey negative outlook, Russia negative outlook, the UK negative outlook,” said S&P’s EMEA head of sovereign ratings Moritz Kraemer.
“South Africa, Saudi Arabia, Nigeria will be interesting to watch and of course Brazil … I could throw in China for good measure too, but that is a story which we believe will be pretty stable for a little while longer.”