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NOMPU SIZIBA: Credit rating agencies are a powerful force, especially when it comes to making a call on a country’s credit worthiness. Global investors and market players take to heart the views of the big three credit rating agencies, and their views often determine the extent to which a country has access to finance – and at what cost. With South Africa deemed to be in junk status territory by all three over a decade, it’s had to endure government-debt bond yields in excess of 12%.
I’m joined by Casey Delport. She’s an investment analyst in the fixed-income division at Anchor Capital. Thank you very much, Casey, for joining us. Just give us a quick reminder of the role of rating agencies when it comes to sovereign credit – and why market players take it so seriously.
CASEY DELPORT: Good morning and thank you for having me on the show today. Essentially sovereign credit ratings are really assessments, as you mentioned, provided by credit rating agencies that gauge the credit worthiness of a country’s government and its ability to meet financial obligations – particularly debt repayments. So in turn you find that these ratings serve as indicators for investors and financial markets to assess the level of risk associated with lending money to a particular government.
So what we see is that major credit rating agencies, such as Moody’s, Standard & Poor’s and Fitch etc. assign grades or scores to sovereign nations based on these various economic and political factors.
They become the de facto base that a lot of investors, particularly international investors, use to gauge if they want to partake in that particular country’s debt.
NOMPU SIZIBA: South Africa’s credit rating first started to be downgraded to junk in 2012 – you’ll correct me if I’m wrong – and the rating agencies kept taking the rating down a further notch as the perception of the country worsened. But even though the country’s economic trajectory and challenges have not really been that encouraging for a number of years, there seems to have been a reluctance by the rating agencies to plunge the country any further into junk.
Why do you think our sovereign credit rating has been so resilient amid so many challenges, albeit still stuck in junk status?
CASEY DELPORT: Yes, it’s a bit of an interesting turn of events. A junk status is by no means a credit rating that any sovereign desires. But really it can be construed as a bit of a positive that we haven’t worsened further. I think it’s largely as a result of the strong beneficiary we’ve been of the commodity cycle in the last few years that actually helped improve a lot of our fiscal metrics in that sense – the ones that the credit rating agencies really focus on.
And then we take into account that there has been some reform progress across our economy, albeit incredibly slow. There have been issues of that popping through.
The credit rating agencies have seemed quite positive around our electricity-reform measures as well, our moving to more private supply. They see the issues at Eskom and our power supply as a key determinant. So that has I think been just enough to keep us sort of floating on water, other than being punched further.
We are not just at the brink of junk status or non-investment grade rating; we are actually quite a few levels down in the metrics already. So I think it would have to be a severe downturn for the rating agencies to plunge us any further.
But I think that a lot of the rating agencies will be waiting for next year, post our electoral cycle, to see what the outcomes are before they reassess any further.
Read:
Moody’s: SA’s lower revenue forecasts, spending pressures raise risks
SA credit rating outlook dims
Fitch affirms SA’s ‘BB-‘ credit rating
NOMPU SIZIBA: Yes. Of course you don’t have a crystal ball, but when you look at the current fiscal metrics right now, Treasury is talking about stabilising public debt to just below 78% of GDP in the fiscal year 2025/2026. While the budget deficit for this fiscal year is expected to be wider at 4.9% – compared to an earlier estimate of 4% – is South Africa at the precipice of a fiscal disaster or is the country doing enough to help steer us away from a major crisis?
CASEY DELPORT: Ironically, if you asked me that question maybe two, three years ago, I would have mentioned that we were very much at that brink. Luckily, we have managed to pull things back a little in the past few years. Again, the commodity cycle has been a huge help in that regard.
Yes, things have worsened this year, starting to make investors feel a bit more uncomfortable, but we are not yet quite at the end of the runway. We still have a little bit of room. We are again seeing those positive reform measures coming through.
We can’t stress enough the positivity that we feel coming in from the benefits and changes in our electricity sector as well. I know it’s hard to feel it as South Africans when we are sitting with load shedding, but things are improving in that regard.
We are seeing that filter through on economic data and our activities. The economy at this point this year remains surprisingly resilient amid everything.
So I think we are inching a little closer [ahead] this year. We’ll have to see with the budget speech in February next year the full extent of where we are sitting. But, as you mentioned, it’s very difficult to pull out a crystal ball, especially with a country that’s moving into an electoral cycle soon enough. You’re seeing a lot more instances of populist policies coming through from our government, so it’s very hard to see through that noise.
So in terms of forecasting abilities I always say we need to wait until after the election next year, so we can sort of see a clear path going forward.
NOMPU SIZIBA: Fair enough. And then one last thing. The Reserve Bank made a call to leave interest rates unchanged yesterday, pretty much in line with market expectations. But do you think that we’ve come to the end of the road in terms of rate hikes?
CASEY DELPORT: Yes. I think we have come to a peak with regard to interest-rate hikes, and we believe that we will remain at our current levels for some time. At the end of the day the forward-looking real interest rate is already high enough for the prevailing economic backdrop, without inflation for costs actually remaining inside the target range and demand-driven, and wage inflation actually remaining modest.
I think any possible interest-rate cuts will likely materialise only towards the end of 2024.
This will depend on the inflation outlook both locally and globally and interest rate developments across the globe as we progress into the new year.
I know the market has been fairly bullish until yesterday. We could possibly see interest-rate cuts in the second quarter of next year. We’ve always maintained that it’s very much an end-of-2024 story, even only going into 2025.
NOMPU SIZIBA: All right. Thank you so much for your insights on this early morning, Casey. That was Casey Delport. She is an investment analyst in the fixed-income division at Anchor Capital.
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