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 $14 billion (R200 billion).
This would have lowered the value of our bonds, and make it much more expensive for government to borrow money to keep the country afloat.
Retaining our investment grade rating, which SA has held since 2001, should mean the following:
A sell-off of government bonds would have meant a massive outflow of money out of the country – putting pressure on the rand.
A weak rand affects everything, starting with fuel prices. Oil is South Africa’s biggest import. If the rand weakens, oil (which is priced in dollars) becomes basically immediately more expensive.
Imported electronics and machinery are pricier if the rand is weak. And South Africa’s maize and wheat prices are also linked to the global dollar prices.
The rand remained relatively stable following the announcement at R14.48/$.
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.
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.
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.
Source: Business Insider SA