Africa's most industrialized economy is seen at risk of losing its
investment-grade status because of persistently weak growth and
large deficits. Many investors are also unhappy with President Jacob
Zuma's handling of the economy.
A change in ratings to speculative grade, known as "junk", typically
leads to a sharp rise in borrowing costs. That would be bad news for
South Africa, whose debt servicing needs are already projected by
the Treasury to rise to nearly 180 billion rand ($12 billion) in
But South African dollar debt trading in JP Morgan's Emerging
Markets Bond Index is already yielding more than that of countries
with similar credit ratings, such as Romania or India, and even some
lower-rated peers like Russia and Turkey.
"A lot of things that people say would happen if we are downgraded,
have already happened," NKC African Economics analyst Francois
Conradie said. "A lot of capital left the country in the second half
of last year, especially in December."
"Even at investment-grade we are already paying as much as other
countries that are sub-investment grade -- it's like we have already
South African bonds in the EMBI Global index were trading at a
premium of 410 basis points over U.S. Treasuries on Friday, while
Russian bonds traded at just 274 basis points <11EMM>.
The cost of insuring South Africa's debt against default has also
leapt, with its five-year credit default swaps trading at 318 bps on
Friday, according to Markit, versus 289 bps for Russia and 258 bps
For GRAPHIC on CDS prices, click
Rating agency Moody's placed South Africa on review on Tuesday,
saying it was concerned about Pretoria's ability to restore fiscal
strength and boost growth.
Moody's, which has assigned South Africa investment-grade status
since it began rating the country in 1994, currently rates the
sovereign Baa2, two notches above junk and slightly higher than the
BB- ratings of Standard & Poor's and Fitch.
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Yields on the benchmark domestic government bond have jumped as much
as 62 basis points since early December, when Zuma alarmed investors
by changing finance ministers twice in a week, while the rand
has fallen nearly 5 percent against the dollar.
The economy is forecast to expand just 0.9 percent in 2016 while the
country has large budget and current account deficits which it has
relied on foreign investors to finance.
But sentiment towards South Africa has deteriorated since Zuma's
sudden switch of finance ministers in December. That same week,
foreign investors sold a net 5.6 billion rand of South African
shares, according to data from the Johannesburg Stock Exchange.
JSE data also shows foreign investors sold a net 965 million rand of
stocks last year after buying a net 13 billion rand in 2014. While
they were net buyers of the country's bonds to the tune of 778.5
million rand, that was much less than the 2.9 billion rand they
bought in the previous year.
Business confidence among local investors has meanwhile fallen to a
Markets have calmed since Pravin Gordhan, respected for a previous
stint at the ministry, was appointed as finance minister but any
rating cut is still likely to trigger a further sell-off in South
"Even if markets expected (the downgrade), some forced selling from
funds and investment managers would ensure some degree of
volatility," IGM analyst Christopher Shiells said.
(Editing by Catherine Evans)
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