Deep and liquid local debt capital markets have reduced the need for South African companies to borrow abroad, making them less vulnerable to a financial crisis than peers in Turkey and other emerging markets, according to Moody’s Investors Service.
Large external financing needs and a plunging currency are proving a toxic mix for Turkey’s corporate sector. But in South Africa, companies have enough access to local funding, and those that have turned to foreign debt used hedging strategies to cushion the effects of short-term currency fluctuations or buy time to adjust to long-term rand weakness, Moody’s said in a report dated September 12.
In addition, most foreign borrowing by South African companies has been driven by offshore expansion and the debt is serviced with cash flows generated in the same currency, creating a natural hedge to currency weakness, the report said.
“Currency volatility in emerging markets has been one of the key focus areas for investors this year, particularly in terms of how it affects credit risk for companies,” Moody’s analysts lead by Dion Bate said in the report. “Despite continued rand volatility, we expect the credit quality of most South African companies we rate to remain broadly stable during the next 12 to 18 months.”
About 38% of South African non-financial corporate debt is denominated in foreign currencies, according to Moody’s. That compares with 56% for Turkey, or an amount of $336 billion, almost triple the borrowers’ assets, according to data compiled by Bloomberg. The lira’s 40% slump this year will make servicing those loans more burdensome, lowering capital spending and GDP growth.
Moody’s expects the rand to remain volatile over the next year, driven by how successful the government is in implementing economic reforms, as well as global factors including the US policy path, trade tensions and emerging-market turmoil. That will complicate the operating environment and investment decisions for South African companies, Moody’s said.
Moody’s flags MTN and Hyprop Investments, which have around 47% and 74% of their debt in dollar or euros respectively, as companies most exposed to volatile debt-servicing obligations. Hyprop funded its offshore property acquisitions with a high proportion of debt, while MTN – currently rated Ba1 under review for a downgrade – is not able to fully hedge its offshore operational exposure.
Companies with moderate foreign-exchange exposure tend to have well-managed hedging strategies that reduce the impact of rand volatility. Among those are real-estate companies Fortress Reit and Growthpoint Properties, which hedge their foreign income between 12 and 36 months forward.
State-owned rail and ports operator Transnet, on the other hand, has little currency risk as it converted all its foreign obligations — amounting to 22% of total debt — to rand. Companies which generate most of their revenue in South Africa and which have rand-denominated debt, including Bidvest Group and telecoms operator Telkom, will be the least affected by rand volatility.
“However, a weaker rand will increase costs of imported raw materials and equipment which erodes credit quality through lower operating margins and lower free cash flow generation, if these costs cannot be passed on to the consumer.”
Rand volatility will have a muted credit impact on South African miners. “The operating margins of gold, platinum-group metals and diamond miners will remain insulated from rand dollar exchange rate volatility. We expect commodity prices in rand terms to remain broadly flat during the next 18 months because of the favourable interplay between the US dollar and the South African rand.”
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