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
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.
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’