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This is what awaits South Africa if Moody’s cuts its rating to junk

Some analysts predict a downgrade is already priced in.

Most analysts following South Africa expect it to lose its final investment-grade rating. But they disagree over when that might happen and what the consequences would be.

The gloomiest reckon it would trigger more than $10 billion of outflows and cause the rand to weaken to its lowest level in almost four years.

Others say investors have already priced in a downgrade and South African assets may even rise in the aftermath, especially if sentiment toward emerging markets stays strong.

Moody’s Investors Service, which rates South Africa Baa3, one step above speculative grade, cut its outlook to negative on November 1. That followed Finance Minister Tito Mboweni’s budget statement, which showed the government’s financial situation deteriorating rapidly.

Read: Moody’s leaves South Africa teetering on brink of ‘junk’

‘Mixed picture with some positive signs’

If Moody’s does downgrade South Africa, rand bonds will be excluded from the FTSE World Government Bond Index, which comprises 14 currencies including the dollar and yen, and has about $3 trillion tracking it, according to Bank of New York Mellon. Foreign investors own 37%, or about R780 billion, of South Africa’s local-currency bonds, according to National Treasury data.

Here’s what analysts say the impact would be:

Bank of America:

The US lender expects a rating downgrade soon after February’s budget review, doubting President Cyril Ramaphosa’s administration will manage to address concerns about a widening fiscal gap or debt-laden state power company Eskom by then. But analysts David Hauner and Jure Jeric say markets have priced this in and outflows may only reach $1.5 billion, especially if China and the US continue to buoy emerging markets by reducing tensions over trade. South African assets are cheap and “post-downgrade, the market is likely to rise as uncertainty declines,” they said in a note this month.

Bank of New York Mellon:

Daniel Tenengauzer, head of markets strategy, is in the bearish camp and forecasts between $8 billion and $12 billion of outflows if South Africa exits the WGBI. Its status as the highest-yielding country in the index may not help much to curb the selling, he said. Rand bond rates average 9.2%, about 360 basis points more than those for the second-highest yielding currency, the Mexican peso.

Citigroup:

A downgrade around March is possible if South Africa fails to come up with a “credible debt-stabilisation strategy,” which will involve tough negotiations between the government and unions about reining in spending, according to Gina Schoeman, an economist at the Wall Street bank. Moody’s “tolerance appears low,” she said in a November 4 note to clients, adding that a WGBI exclusion would probably lead to between $6 billion and $7 billion of capital exiting the country.

Intellidex:

South Africa’s chances of avoiding a downgrade after the February budget are 50:50, said Peter Attard Montalto, the London-based head of capital-markets research. A cut has been priced in to “a moderate degree” and could result in $5 billion of outflows, he said.

Investec:

Annabel Bishop, the bank’s Johannesburg-based chief economist, said a negative outlook, rather than a ratings watch, means Moody’s will probably give South Africa as long as 18 months to improve its finances. The government’s 10-year local-currency yields may rise to about 10% if there’s a downgrade, but they probably won’t climb as much as those in Brazil and Turkey did when they were cut to junk, she said.

Rand Merchant Bank:

Moody’s “really marked South Africa down because of our politics,” Kim Silberman, a fixed-income analyst at the Johannesburg-based investment bank, said in a video for clients on November 4. She thinks a downgrade by March is now “quite possible” and the rand would probably drop to 16 per dollar, 7.6% weaker than its current rate and a level not reached since early 2016. Adrian Schwellnus, a bond trader at RMB, said outflows could amount to anything between R30 billion and R200 billion. “One thing is that this global environment is probably the most ideal for a downgrade to happen in,” he said.

Standard Chartered:

“We do not see a downgrade as early as March as being at all likely,” said Razia Khan, the bank’s London-based chief economist for Africa and the Middle East. The negative outlook from Moody’s “provides the authorities with exactly the political cover they might need to take a firm stance on reforms,” and a pickup in growth next year may mean a cut’s avoided altogether, she said. Even if it isn’t, estimates of outflows of around $10 billion “look significantly overstated,” said Samir Gadio, StanChart’s head of Africa strategy.

© 2019 Bloomberg L.P.

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SA is like an impending car crash in extreme slow motion (like those viewed in NCAP-tests). You KNOW that the test-vehicle will hit the wall…as it’s part of a process.

This is what makes International funds/investors/analysts predictions easy: They have ALREADY TAKEN THEIR POSITIONS months or years ago…now is just wait for ‘confirmation’. (And they have many prior junk-countries’ similar models to help with prediction).

SA’s bond position on global markets is like “Sending in the damages claim to the insurance already, before the car is about to hit a stationary object”.

(Just strange to think that the ANC loved junk-status during Apartheid so much, they’re eager to return SA back to those days….without the sanctions. You don’t need sanctions to bust up a country…give it to the……)

According to the World Economic Forum’s latest World Competitiveness Report South Africa has the worst labour-employee relations in the world, ranking 137 out of 137 countries. We also have the highest unemployment figure in the world. With labour unions in the tripartite alliance, where they dictate economic policy, we are also one of the most socialist countries in the world. Therefore, our economy is in a trajectory of steady decline. We are distributing a shrinking cake, instead of baking a bigger cake.

The tripartite alliance is a millstone around our necks. The international business community wants to see action against the unions from Ramaphosa before they will invest.

We have the worst labour. Period

I’m not sure it’s even socialism. What we have is a special interest lobby group acting on behalf of its members (who are a minority of even the working population, never mind the unemployed) with disproportionate influence over state policy. It’s another form of state capture.

LOL Sensei – All the Cake Bakers have left the country !!!

We’ll need to Maggie for that.

Yet you still live there. You don’t take what you are saying seriously. How are we to take it?

Is your preaching to the converted in a little echo chamber helping you? Armchair activism. All moaning. No action. Even for your own sake.

Weather men cannot predict the weather 100%, we all know what is going to happen, when it will happens and the degree at which it will happen.

Like with all things 33% of it has already been priced in (R15 to $1), there will be overselling (Rand at R20 to $1) for the first week and a back buy after the 3 week (at R17.50 to $1)

My plan:
Companies that will benefit the most are the one where they have least exposure to unions and employ skilled to highly skilled employees with a focus on exporting products. We know the Goverment will cut back spending and companies will only spend capex if what they are buying will make them less dependant on government, Labour and electricty.

If you don’t know which shares to buy, get some Gold or Crypto Assets.

Did you also predict the various crypto crashes? Or nah?

@Anything I don’t buy what I don’t understand.

Cryptos are a very new asset class and I expect extreme volatility with one 2% of all them making it a success.

There will be a top 5 in the world which will own 90% of the global market. Hard to say which will top five.

My advice here take R500,000 and spread it over 50 cryptos with the expectation of making 0 returns in 2 to 5 years.
That’s if you have an appetite for risk.

Yet you still live there. You don’t take what you are saying seriously.

I do my dear friend. I do.
ANC policies keep their own voters in poverty. My capital works offshore, while I use ANC-sponsored cheap labour in my kitchen and garden. The ANC creates a holiday haven for wealthy people and a hellhole for people without jobs. My aim is to better the lives of honest, hardworking people who are trying to put bread on the table. The ANC is the enemy of the people.

@Sensei. You’re correct is saying “the ANC is the (real) enemy of the people”.

Proof in the pudding is comparing the unemployment data at the end of Apartheid, and the current unemployment data….SA is at it’s worst ever % (…and that is after 2,5 decades of ‘freedom’)

yet you still live there. I can’t take people seriously if they can’t take themselves seriously.

Yet you still live there. You don’t take what you are saying seriously. How are we to take it?

It is like a friend of mine once said: “It is impossible to enter into a coherent and meaningful discussion with a person who did not have math in grade 12”. God knows, that is the truth. You are the living proof, my brother.

So you have no point there at all? Nothing at all?

Living in a slow motion car wreck but all you do is moan. Is you believed yourself, you would have left like most of the intelligent people.

And you will pat yourselves on the back for your arm chair activism of ‘spreading the word’ in an echo chamber. So brave! This is why you aren’t taken seriously anymore. You are too busy moaning and doing nothing about it, except for preaching to the converted.

It’s not $ 10 Billion Dollars. It’s R 147,700,000,000

That’s R 147 Billion that leaves. Where does it come from??

Imagine your new taxes to help the “poor.”

It’s a big number but of course the debt continues to exist and the ZAR takes the strain as existing holders of debt sell their ZAR bonds and convert to USD. The real issue is the impact on the demand for and cost of future debt issuance. Relative to SA’s needs there is a huge pool of investment looking for higher yielding assets, the country just has to work out how to pay for the higher debt servicing costs. Local investors may take up some of the strain – voluntarily or perhaps not by way of prescribed assets. Whatever happens we will be forced by external factors to align future expenditure with income and that is going to take some doing given the culture of non payment that has taken hold.

While it lasts I think we should enjoy the RWC2019 afterglow

Even socialists know that raising taxes beyond a certain point, will result in less tax being collected. So they will go after the soft targets. Your pension savings.

If the outflow is from selling bonds, it comes from the buyers. If it’s from bank deposits, it comes from banks. It’s not (for once) something taxpayers have to fund.

So predictable and still so sad. Corruption has brought many countries to their knees.
The ANC has taken us to this.

I agree with many other commentators the government will reach out to private pension funds as a reactive solution rather than designing a solution from a higher purpose. I think this indicates the unpreparedness of Ramaphosa and his administration in facing the problems that afflicts us. The president seems to be sold the economics 1 bible that investment in any form is good.Ignoring the preconditions needed to make the social flower bloom.

We are in a generational conflict over the benefits of the social contract. While Paul Samuelson won the Nobel prize for economics for delving into how the financial economy influences the real economy in his paper, “An exact consumption-loan model”, less spiritually evolved beings dominate our financial system today. It is a sad indictment that our financial planners, financial instrument markets and bankers have not been outspoken that there are grave intergenerational imbalances in our economy that has been rearing its head for the last decade or so. These “blessers” are meant to be the removers of obstacles, yet they cannot negotiate between us nor make us sign a fair social contract that creates balanced risk taking, investment and consumption. Its the private sector who should be more ashamed and humbled at their ineptitude, for we are all bonded irrespective of age, sex, race: past, present and future.

At the risk of sugarcoating the grave economic situation we find, the downgrade is likely to be a nothingburger – IMO.

Being a participant of the WGBI is not a criterion for foreigners to own SA bonds, it is just a criterion for index trackers to own SA bonds.

In a world where negative yielding debt is now in excess of 17 trillion US$ – high yield risky debt like South Africa becomes attractive to a lot of alternative asset class investments.

What we lose on the swings, will be made back on the roundabouts – that is, of course, until the ANC does something stupid – like EWC, or worse still, replacing Cyril – just like all the previous ANC presidents that have been replaced.

Good comment, Sybrenv.

Japanese, European & other global regions are close to zero or even negative interest rates. Global growth has also slowed & there are many countries with sub-2% growth rates. Developed markets capital has to go somewhere for better yield, and take higher EM risk.

Looks like about half of countries globally are already sub-investment grade:

https://countryeconomy.com/ratings

Plus global funds/investment community have adjusted their positions on SA long ago (junk status for SA was news since 2015 Nenegate).

Also not a bad time (globally) for a country to enter junk (as bad as it may seems) as the developed markets has to take some risk in emerging markets. (A lot depends on market certainty, e.g. the way US-China trade talks go, Brexit, etc)

Almost like Brexit. The feeling among Brits are to just get it done and over with, so that the country can move on. Same sentiment with SA asset managers re junk.

Aye, add to this that (I believe) most of SA debt is ZAR denominated so not at risk of blowing out of proportion with currency devaluation greater than inflation, although they will go hand in hand.

Actual risk is the evaluation of SA’s ability to fund the borrowings. If the country starts looking like becoming like SAA and Eskom where the business cannot service the debt, the already quite high bond rates will have to rise to reflect the risk and the debt trap is baited.

Where is Nedbank’s comment?

I don’t trust these other banks!

Who cares what that mickey mouse local bank thinks. Really.

While I don’t think it will not be a disaster.. I have a suspicion we in a 2008/9 scenario except in this re-run we have someone better at the helm and a unity event which is kicking tactics politicians use to cause divides.

In worse case scenario you have to consider global context, ie US heading into a recession and global slow down already being felt.. likely go for final (that they can afford) major QE phase in US which could see money coming it purely on better returns despite risk. So yah.. outflows and then inflows.. only question is will we make the most of it this go round and will unions be kept at bay as it’s gonna get tough.

We’re no worse off than the rest of the world – we just have a bright light shining on us at the moment.

The rating agencies are human decisions not an algorithm so sentiment pays a huge part in this. In my opinion, The US is doing its best to inhibit Golds value, having given up their advantage to India and China and successfully destroying the Gold Standard – a means in which to keep the Dollar as the measurement of value.
So, just like Trump and Johnson, they might use any means to take the heat off themselves by shining the light elsewhere. I take it as a compliment that they’ve chosen us as the victim. It shows we still have some economic credibility!

As an ex-SAffer with family in SA, I can tell you with 100% certainty that the comment “We’re no worse off than the rest of the world” is absolutely untrue.

I won’t go and mention the multitude of reasons for this that have already been stated by other bloggers….

Once everything’s said & done.
It will all depend upon … what ‘Moody’ you happen to be in!

The ANC Government is incapable of managing the fiscal crisis. Something has to give and unprecedented social unrest is on the cards.

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