Here appears to be rumours doing the rounds predicting an almighty crash of the rand on the back of rating downgrade expectations for later this year. S&P rating agency are expected to announce heir SA sovereign rating review early in December. They will be focusing on our GDP growth rate; our budget and current account deficits.
Our growth rate is likely to disappoint with current expectations for growth marginally above zero. Mr Gordhan is doing everything in his power to reign-in the budget deficit, which is no mean feat considering the pressure on Government finances from a slowing economy and wasteful expenditure, not to mention a bloated civil service wage bill and 15+ million people on social grants. Fingers crossed, but don’t hold your breath.
The one glimmer of hope is the current account deficit, which has improved significantly on the back of a weaker rand and a recovery in commodity prices. Recent announcements by Moody’s in respect of negatively reviewing their rating for State Owned Entities (SOE) debt is certainly adding fuel to the fire. Not to mention the political shenanigans between Presidents Zuma and our Minister of Finance with a blatant threat to the sovereignty of the Treasury, which would indeed see the rand take an almighty crash should this highly regarded institution be “captured”.
However, disregarding the risk to Treasury, which appears to have reached a stalemate of some sorts, I am not so sure we should be that concerned with the high likelihood that we will indeed be downgraded in December. Keep in mind the rating review in December concerns only our foreign denominated debt, which makes up only 10% of our total debt. The other misconception is that the large international bond tracker and pension funds would be forced sellers of our government debt should we be downgraded, which is incorrect. This would only occur on the downgrade of our local denominated debt, which is still rated well above sub-investment grade (junk) by all three rating agencies.
I am not saying there will not be a knee-jerk reaction to a downgrade announcement, which will affect confidence driving government bond yields up and weakening the rand, but not an almighty crash as the doomsayers are predicting. Don’t forget markets are forward looking and have most likely already priced in the probability risk of the downgrade. A good indication of this is the cost of insuring SA bonds known as credit default swaps (CDS), which are already priced as junk. Current SA bond yields of +-8.5% are very attractive for foreign investors vs. unprecedented low yields on developed market debt more than compensating for downgrade risks.
So as usual calling short-term macro drivers is as “clear as mud” be careful to be swayed by short-termism thinking and bad news headlines.
Mcomm, CFP®, HdipTax
T. 021-851 3746