Barclays’ South African sovereign credit rating outlook

In line with our expectations, Standard & Poor’s downgraded South Africa’s local-currency rating to BB+(Stable Outlook) from BBB-(Negative Outlook) on 24 November, citing fiscal concerns, especially what it refers to as “a high and rising stock of government debt.” The agency also lowered South Africa’s foreign-currency credit rating to BB (Stable Outlook) from BB+ (Negative Outlook). We do not expect any further rating action from S&P in the near term, given it now regards the country’s outlook as stable. To the contrary, we expect a downgrade from Moody’s, which maintained the country’s sovereign rating at Baa3 (Negative Outlook), but placed it on review for downgrade – a move that now suggests the agency will wait until after the ruling party’s December 2017 elective conference and the February 2018 budget before taking any action. A downgrade could occur as early as the first week of March 2018, in our view.

USDZAR is trading almost 1.5% higher from its Friday afternoon lows of 13.82,  and SA local market assets are likely to underperform their high-yielding EM counterparts after a mostly expected decision by S&P to downgrade the South Africa’s sovereign local-currency rating one notch, to BB+, sub-investment grade, and the less-expected decision by Moody’s to place the sovereign on Negative Watch. A Bloomberg survey of analysts prior to the decision showed most (9 out of 16) expected a downgrade by S&P but just 4 out of 16 expected a downgrade from Moody’s. SAGBs are no longer eligible for the Bloomberg Barclays Global Aggregate Bond Index, and the associated passive selling, which could be as much as USD4bn, is likely happen when the index is re-weighted on Friday, 1 December. If Moody's also downgrades the local-currency sovereign rating, as we expect, SAGBs would no longer be eligible for Citigroup’s World Government Bond Index. Focus will now centre on the likelihood of this action along with the size of potential SAGB selling; and into year-end, we expect a continuation of the ZAR and SAGB underperformance that we have witnessed since September.

27 Nov 2017 - 10:36- Economic Commentary- Source: Barclays