South African Credit Ratings to be Downgraded "One Notch" at all Three Agencies: Analyst

Above: Pravin Gordhan, Former Minister of Finance of South Africa Pic Credit: WORLD ECONOMIC FORUM/swiss-image.ch/Photo Nicola Pitaro

Analysts at Rand Merchant Bank have told clients they expect South Africa’s credit rating to be cut at all ratings agencies following the removal of Finance Minister Pravin Gordhan.

Gordhan was dismissed late-night Thursday in a move that saw the South African Rand plunge.

Gordhan is held by markets to be a bulwark against corruption in an administration that is facing growing criticism.

He was one of several members of Cabinet to go as President Jacob Zuma conducted a major overhaul.

Key for the outlook of the economy and the Rand will be how rating agencies respond.

“We think it is very likely that all the agencies will downgrade the sovereign credit rating by one notch each,” says John Cairns at RMB in Johannesburg.

This means that the foreign currency credit rating from S&P and Fitch will fall to BB+, while it will sit at the edge of investment grade at Moody’s, Baa3.

“We think all three rating agencies will retain their negative outlooks,” says Cairns.

Moody’s action will occur as per schedule on 7 April.

Fitch is not bound by a timeline so it can also act quickly.

“It is not certain but S&P might bring forward its review to the coming weeks, ahead of the scheduled 2 June deadline,” says Cairns.

The analyst also warns that the South African Rand could fall further from here.

The analyst notes:

“Rand weakness in this entire episode has been far more constrained than we thought likely.

“We’ve argued that this might have been because the market did not believe that Gordhan would go.

“If so, then a bigger reaction is likely this morning: early morning losses have been calibrated on early week losses and nothing more.

“Perhaps more importantly, as we discuss below, foreign investors have not panicked. But they too might have been too complacent. As such, the risks in our view are still for far bigger losses than suffered so far.”

Meanwhile, if South Africa loses investment grade status, Barclays estimate net forced selling of around USD0.5bn worth of SOAF US Dollar priced bonds.

SOAF is the acronym used to indicate South Africa’s sovereign bonds.

However, analyst Andreas Kolbe at Barclays notes historical Emerging Market fallen angel performance patterns suggest that the most significant pressures would be felt in the EUR paper.

“With SOAF EUR ’26s currently trading flat/inside the USD curve, we recommend selling. For investors wishing to maintain overall exposure, we think a switch into the 10y sector of the USD curve makes sense,” says Kolbe.

The impact of recent events are notable and the extent of the damage a ratings downgrade will deliver extends beyond the Rand.

"In London, the likes of Anglo American and Old Mutual are suffering heavy losses as investors begin to worry about what the future holds for South Africa. Emerging markets have performed well so far this year,
 but South Africa’s troubles are clearly beginning to make people nervous, and a ratings downgrade could well intensify things," says Chris Beauchamp at IG, the spread betting providers.

Rand Could Feel Further Heat

On the currency front there are warnings that further losses in ZAR cannot be discounted.

"Rand weakness in this entire episode has been far more constrained than we thought likely. We’ve argued that this might have been because the market did not believe that Gordhan would go. If so, then a bigger reaction is likely this morning: early morning losses have been calibrated on early week losses and nothing more," says John Cairns, an analyst with RMB.

Concerning the outlook, Cairns does however warn of further potential losses.

"Perhaps more importantly, foreign investors have not panicked. But they too might have been too complacent. As such, the risks in our view are still for far bigger losses than suffered so far," says Cairns.

Gordhan’s successor is the former minister of Home Affairs Malusi Gigaba, however, markets have reacted negatively to the appointment given his relative lack of experience and profile.  

"The market will struggle to digest Gigaba. We think this is bad for the market and for SA," Nomura emerging markets analyst Peter Attard Montalto said in a note