Money and Markets

South Africa is still not 'junk' – here’s what Moody’s latest move means for you

Business Insider SA
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  • In a surprising move, Moody’s did not make any announcement on South Africa’s credit rating.
  • It could still downgrade us to “junk” at any time – but for now, consumers get a break. 
  • A downgrade would have tanked the rand and increased the likelihood of higher taxes in future.

In the early hours of Saturday, South Africa again avoided a massive blow: its government bonds were not downgraded to junk.

In a surprising move, Moody’s did not release any report – but just said that “ratings were not updated” for South Africa.

Friday was the scheduled day for an announcement on South Africa’s credit rating. The next date is in November – but Moody’s can change its ratings at any time.

South Africa currently has a Baa3 rating, the last step before “junk”, with a stable outlook. Polls among economists showed they were split on whether Moody’s would change South Africa’s outlook to “negative” (from stable) – and some predicted it would go all the way to “junk”. A “junk” rating means the agency believes there's is a bigger chance that government won’t be able to pay back its creditors.

The two other big ratings agencies, Fitch Ratings and S&P Global, lowered South Africa's credit rating to "junk" in April 2017 after Pravin Gordhan was fired as minister of finance.  

If SA lost its investment rate grade from Moody’s as well, it would have cost the country its place in the most important group of government bonds. The Citigroup’s World Government Bond Index contains only bonds that are investment grade. 

All the many overseas investment funds that are only allowed to invest in investment grade bonds would have been forced to sell their South African government bonds. 

Bank of America previously estimated that South African bonds would have been sold off to the tune of $14 billion (R200 billion).

This would have lowered the value of our bonds, and make it much more expensive for government to borrow money to keep the country afloat. 

What are government bonds?

A bond is basically an IOU, with the borrower agreeing to repay an amount plus interest. If a bond issuer is seen as riskier, investors will demand higher interest rates. If South African bonds were rated as junk, government would have to pay higher interest rates. This means the state would have to pay billions more in interest, at the cost of investments in local roads, hospitals and services. 

Retaining our investment grade rating, which SA has held since 2001, should mean the following: 

1. The rand will get some respect

A sell-off of government bonds would have meant a massive outflow of money out of the country – putting pressure on the rand.

A weak rand affects everything, starting with fuel prices. Oil is South Africa’s biggest import. If the rand weakens, oil (which is priced in dollars) becomes basically immediately more expensive.

Imported electronics and machinery are pricier if the rand is weak. And South Africa’s maize and wheat prices are also linked to the global dollar prices.

The rand remained relatively stable following the announcement at R14.48/$.

2. Interest rates

A weak rand means higher inflation, as more expensive fuel and other imported products push prices higher.

Given that some of the pressure on the rand should ease, this means that inflation will be contained. And this gives the Reserve Bank some leeway to perhaps cut interest rates as a much-needed boost to a comatose South African economy.

3. Banks can breathe more easily

The credit ratings of Standard Bank, Absa, Nedbank and FirstRand are all tied up to the rating of South Africa, where they make most of their profit. S&P downgraded seven local banks directly after it cut South Africa to junk. This means that banks have to offer higher interest rates when they borrow money. 

By law, banks are also forced to hold government bonds, which would have hurt them in case of a bond sell-off.

4. Further income tax and VAT hikes may be limited

If government has to pay more in interest on its debt, it will need more money from you to cover its basic expenses. This can only mean one thing: higher taxes.

For more, go to Business Insider South Africa.

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