Fitch Rates SA : Experts Say Junk Status Is Not the End of the World


Amid heated political crisis spearheaded by the nationwide anti Zuma protesters, rating agency Fitch downgraded South Africa to junk status.

Standing as the second global ratings firm to downgrade South Africa to sub-investment grade after S&P, Fitch said its decision to downgrade the country’s foreign currency was mainly because of president Jacob Zuma’s recent cabinet reshuffle, which according to it, will continue to weaken standards of governance and public finances.

Following this news, SA rand weakened on Friday afternoon to R13.8426, after hovering around the R13.77 to a dollar at the early hours of the day.

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Fitch had both the nation’s foreign and local currency downgraded by one notch on Friday afternoon on concerns that recent cabinet reshuffle, including political turmoil that follows the event have battered the country’s economic policy.

“The issue ratings on South Africa’s senior unsecured foreign- and local-currency bonds have been downgraded to ‘BB+’ from ‘BBB-‘. The rating on the Sukuk trust certificates issued by RSA Sukuk No. 1 Trust has also been downgraded to ‘BB+’ from ‘BBB-‘, in line with South Africa’s Long-Term Foreign-Currency IDR.

The Short-Term Foreign and Local-Currency IDRs and the rating on the short-term local-currency securities have been downgraded to ‘B’ from ‘F3’. The Country Ceiling has been revised down to ‘BBB-‘ from ‘BBB’.” said the rating agency.

The agency went on to note that the reshuffle partly reflected efforts by the outgoing finance minister to improve the governance of state-owned enterprises (SOEs).

The reshuffle is likely to undermine, if not reverse, progress in SOE governance, raising the risk that SOE debt could migrate onto the government’s balance sheet, it added.

Read Fitch’s Full Text On The Downgrade here

Despite all the downgrades from rating agencies this week, economic experts say South Africa still stand the chance of improving its attractiveness as a Foreign Direct Investment (FDI) destination.

Naspers Group CEO Bob van Dijk, Lonmin CEO Ben Magara, and Sigma Capital executive chairperson Phuti Mahanyele and many other respected companies leaders who participated in a panel discussion hosted by Sanlam Private Wealth and Financial Mail on Thursday evening came to a consensus that aside credit downgrades by rating agencies, investors look at other factors that can help protect their long-term investments.

These factors include whether or not the regulatory regime can provide reliable long-term protection on investments.

Firms like Naspers invests in companies with the potential of substantial growth over the next few years, including those in ‘challenging’ markets, Daniël Kriel, CEO of Sanlam Private Wealth — Van Dijk indicated.

“We’ve invested a lot of capital in Brazil, for example, which has also been downgraded to junk status. But we don’t look only at a country’s credit rating. For us, the main question is around the business opportunity, but it’s also about being comfortable that an investment will be protected over the long-term.” Van Dijk also noted, citing India as another example of a ‘highly investor friendly’ emerging market.

“The regime in India is committed to creating a stable and predictable environment for investment, and the country has enjoyed strong economic growth for a number of years.

“Also, India has invested heavily in technology infrastructure and has now overtaken the US in terms of the number of internet users. Three years ago, around 100 million people had internet access, but this number has now increased to 500 million. All these factors are very compelling from an investment perspective,” the CEO said.

Furthermore, Lonmin’s Magara stressed that though South Africans need to be ware of its politics, it still must pay much attention on its policies because it is the policies that determine the growth of businesses.

However, it said the nation’s politics should not be ignored because politicians make the policies that we need to grow our businesses.

“Consistency of policy and stability are crucial, and we hope that the new finance minister will realize the value of collaborative efforts such as the CEO Initiative in ensuring that we address the issues our country is grappling with,” Magara said.

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Sigma Capital’s Mahanyele – formerly CEO of Shanduka Group –  said the only way the country can pull itself out of the current political and economic quagmire is through the actions of ordinary citizens.

“We can no longer sit back and wait for the politicians to act. We all need to get involved. If South Africans stand up and show the world they want change, this will go a long way towards encouraging investor confidence.” Mahanyele.