investment note - Old Mutual Wealth

Nov 27, 2017 - South African government bonds will remain part of the Citigroup World. Government Bond Index (WGBI), but only just ... But the rating for both local and foreign currency bonds remains investment grade at Baa3, and therefore the local bonds ... in the exchange rate. But the fairly steady path of core inflation ...
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INVESTMENT NOTE 27 NOVEMBER 2017

SAFE FOR NOW, BUT RATINGS RISK REMAINS DAVE MOHR & IZAK ODENDAAL, OLD MUTUAL MULTI-MANAGERS

27 NOVEMBER 2017

WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE

into the WGBI. Moody’s will wait to see whether Government announces credible fiscal consolidation measures and economic reforms in the February budget. Failure to do so will lead to a downgrade.

SAFE FOR NOW, BUT RATINGS RISK REMAINS

WHAT ARE THE IMPLICATIONS? The rand briefly lost around 2% against the dollar after the announcement, but the overall market impact of the downgrades was limited as markets respond to the factors that give rise to ratings changes – the growth and fiscal outlook – long before the ratings agencies do. Much of the bad news, including the downgrades, have been priced in. In terms of the local economy, the main impact is negative sentiment. There has been an unusually high level of attention given to what used to be a fairly arcane corner of finance and South Africans have spent the better part of the past two years worrying when the sword will drop (and we will have to wait a few months more). There is no doubt that this has damaged

After a round of credit ratings reviews by the three major ratings agencies,

business and consumer confidence. But the downgrades have also

South African government bonds will remain part of the Citigroup World

played a role in keeping interest rates higher than they need to be.

Government Bond Index (WGBI), but only just. The immediate risk of forced selling as a result of being excluded from this index has therefore

RATES UNCHANGED

abated for the time being. While each of the agencies has its own

Ahead of the ratings reviews, the Reserve Bank’s Monetary Policy

specific methodology for assessing creditworthiness, the common thread

Committee (MPC) kept the repo rate on hold as widely expected.

through all three reviews is that economic growth is too low, leading to

The Reserve Bank has also for long been concerned that potential capital

pressure on Government’s finances, worsened by underperforming State

outflows due to downgrades could cause a sell-off in the rand. The firmer

Owned Enterprises (SOEs).

global oil price has also emerged as a factor that will not only raise the

Fitch kicked off the much anticipated (or dreaded) round of ratings reviews

domestic inflation profile somewhat, but could also lift global inflation, prompting faster interest rate increases in other countries, in turn causing

by maintaining South Africa’s BB+ rating with a stable outlook. Fitch noted that while the fiscal outlook weakened, the ship could be steadied

capital to leave South Africa.

after the ANC’s elective conference. Failure to implement credible fiscal

The Reserve Bank lifted its inflation forecast somewhat, but the extent of

consolidation measures in February’s Budget could see the outlook

the increases is limited by conservative assumptions on electricity tariff

changed to negative. To change the outlook to positive, the first step

increases and global oil prices. Inflation is expected to remain below,

to regaining investment grade status requires improving governance

but close to the 6% upper end of the target range throughout 2018 and

(including of SOEs), reducing the budget deficit and, crucially, accelerating

average 5.5% in 2019.

economic growth.

Headline consumer inflation fell to 4.8% year-on-year in October from

DEEPER INTO JUNK STATUS

5.1% in September. Food inflation has moderated to 5.3% from 11%

S&P Global Ratings were not so kind, cutting both South Africa’