S&P Downgrades South African Local Currency Debt

MARKETS

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THE DOWNGRADE HAPPENED

S&P did in fact downgrade South Africa’s local currency debt to “junk” status late last  Friday. This was pretty much expected by the financial markets. The good news is that Moody’s held its ratings constant at investment grade. To recap: South Africa issues debt in rands (local currency) and euros and dollars (foreign currency debt). Both the local currency and foreign currency debt is considered “junk” because two of the 3 major ratings agencies rate it as such. South Africa does however remain within the World Government Bond Index because its local currency debt is still rated investment grade by Moody’s. This means that investors that are only allowed to buy debt that is in the index will not be forced to sell their bonds until we are downgraded by Moody’s.

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The rand weakened nearly 2% against the dollar, but it has subsequently recovered to pretty much where it was before Minister Gigaba’s shocking Medium Term Budget Policy Statement (read our take here). South African government bond yields are around 0.5% points higher than before the MTBPS but actually a little bit lower than in the week before the downgrade (Yields are an indication of the riskiness of debt, the higher the yield the riskier the bonds). The bottom line is that the dreaded downgrade has happened and nothing much has changed in the financial markets. We recently wrote and article and made a short video on what would happen when SA gets downgraded, you can find out more in detail by clicking here. (Reuters)

The graph above shows the rand dollar exchange rate over the past year. If the line goes up it means that the rand weakens. The graph shows that bade news from government is worse for the rand than credit ratings downgrades. (Louwdown annotations of Bloomberg graph)

The graph above shows the rand dollar exchange rate over the past year. If the line goes up it means that the rand weakens. The graph shows that bade news from government is worse for the rand than credit ratings downgrades. (Louwdown annotations of Bloomberg graph)

BUSINESS CONFIDENCE REMAINS LOW

The RMB/BER business confidence index effectively remained the same at 34 (out of 100) in the 4th Quarter of 2017. This is an improvement over the 29 level in the second quarter, which was a 7 ½ year low. A reading below 50 means that most participants are negative about expectations for the future. Improving from 29 to 34 therefore means that participants are becoming less negative on SA. Confidence in the motor and wholesale trade sectors improved, while confidence in building, retail and manufacturing declined. It is important to note that the survey was done before the S&P downgrade. We have talked about how low business confidence is costing SA around 1% of growth, which you can read by clicking here. (BER)

...WHILE OVERSEAS

Stock markets in the US raced past all-time highs and investors expect the US Senate to pass legislation that lowers corporate taxes. (CNBC)

This is our last Louwdown for the year we’ll return with detailed commentary and videos in early 2018

DR ANDREW LOUW CFA

Important note: the Louwdown is not investment advices - speak to your broker or advisor

 

Andrew LouwComment