Africa’s most industrialised 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 2018-19.
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 been downgraded.”
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.
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 Turkey
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.
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 per cent against the dollar.
The economy is forecast to expand just 0.9 per cent 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 five-year low.