Rand Tumbles After S&P Downgrades South Africa To Junk: Full Text

Tyler Durden's picture

While CDS markets had largely priced in a downgrade (with levels approaching those of Brazl), FX markets seemed surprised when moments ago S&P downgraded South Africa to junk, cutting it from BBB- to BB+, in the aftermath of last week's sacking of finance minister Gordhan by president Zuma. The stated downgrade catalyst: "in our opinion, the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes. We assess that contingent liabilities to the state are rising."

As UBS warned on Friday, a junking of South Africa could cause up to $10 billion in outflows, UBS said on Friday. Investment outflows at that level would effectively double South Africa's current account gap, UBS said. President Jacob Zuma's midnight ouster of finance minister Pravin Gordhan deepened a financial market selloff caused by political uncertainty that had been brewing all week.

The departure of Gordhan threatens to tip South Africa's higher profile foreign currency credit rating, currently one notch above so-called junk at BBB-/Baa2, into non-investment grade. Moody's is scheduled to review the rating next Friday.

UBS said however that a bigger danger lay in local currency debt. Rated two notches into investment grade, South Africa is one of the few emerging economies whose local currency bonds are eligible for Citi's World Government Bond Index (WGBI), a global benchmark tracked by over $3 trillion worldwide. 

A two-notch cut to local ratings would exclude the country from the index, UBS noted, estimating WGBI-indexed South African bond holdings at $10 billion - just above the country's 2016 current account deficit of $9.5 billion, or 22 percent of total foreign holdings of South African debt. WGBI membership hinges on investment grade ratings on local debt from both Moody's and Standard & Poor's.

"South Africa's continued inclusion in WGBI rests on a local currency investment grading rating from S&P and Moody's – presently two notches away," UBS analysts told clients. "Any unwind of these positions could effectively double the expected current account deficit."

Fitch said on Friday that the cabinet shake-up heightened political risk and signalled policy change, and could result in a review of its ratings on South Africa.

And while CDS had largely anticipated the move...

... it came as a surprise to the rand which tumbled to 3 month lows on the news.


* * *

The full S&P downgrade text below:

South Africa Long-Term Foreign Currency Rating Cut To 'BB+' On Political And Institutional Uncertainty; Outlook Negative


  • In our opinion, the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes.
  • We assess that contingent liabilities to the state are rising.
  • We are therefore lowering our long-term foreign currency sovereign credit  rating on the Republic of South Africa to 'BB+' from 'BBB-' and the  long-term local currency rating to 'BBB-' from 'BBB'.
  • The negative outlook reflects our view that political risks will remain  elevated this year, and that policy shifts are likely, which could  undermine fiscal and economic growth outcomes more than we currently  project.


On April 3, 2017, S&P Global Ratings lowered the long-term foreign currency  sovereign credit rating on the Republic of South Africa to 'BB+' from 'BBB-'  and the long-term local currency rating to 'BBB-' from 'BBB'.

We also lowered the short-term foreign currency rating to 'B' from 'A-3' and  the short-term local currency rating to 'A-3' from 'A-2'. The outlook on all  the long-term ratings is negative.

In addition, we lowered the long-term South Africa national scale rating to  'zaAA-' from 'zaAAA'. We affirmed the short-term national scale rating at  'zaA-1'.

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA  Regulation"), the ratings on the Republic of South Africa are subject to  certain publication restrictions set out in Art 8a of the EU CRA Regulation,  including publication in accordance with a pre-established calendar. Under the EU CRA Regulation,  deviations from the announced calendar are allowed only in limited  circumstances and must be accompanied by a detailed explanation of the reasons for the deviation.

In this case, the reasons for the deviation are the heightened political and  institutional uncertainties that have arisen from the recent changes in  executive leadership. The next scheduled rating publication on the sovereign  rating on the Republic of South Africa will be on June 2, 2017.


The downgrade reflects our view that the divisions in the ANC-led government  that have led to changes in the executive leadership, including the finance  minister, have put policy continuity at risk. This has increased the  likelihood that economic growth and fiscal outcomes could suffer. The rating  action also reflects our view that contingent liabilities to the state,  particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner. In our view, higher risks of budgetary  slippage will also put upward pressure on South Africa's cost of capital,  further dampening already-modest growth.

Internal government and party divisions could, we believe, delay fiscal and  structural reforms, and potentially erode the trust that had been established  between business leaders and labor representatives (including in the critical  mining sector). An additional risk is that businesses may now choose to  withhold investment decisions that would otherwise have supported economic  growth. We think that ongoing tensions and the potential for further event  risk could weigh on investor confidence and exchange rates, and potentially  drive increases in real interest rates.

We have also reassessed South Africa's contingent liabilities. This reflects  the increased risk that nonfinancial public enterprises will need further  extraordinary government support. We expect guarantee  utilizations will reach  South African rand (ZAR) 500 billion in 2020, or 10% of 2017 GDP. The  utilizations are dominated mainly by Eskom (BB-/Negative/--), which benefits  from a government guarantee framework of ZAR350 billion (US$25 billion)--about 7% of 2017 GDP. We estimate Eskom will have used up to ZAR300 billion of this  framework by 2020.

South Africa's energy regulator has capped Eskom's permitted 2017/2018 tariff  increase at 2.2%--with negative implications for its financial performance.  Eskom will fund the resulting revenue gap via borrowings of up to ZAR70  billion, of which up to half may utilize government guarantees. Other  state-owned entities that we think still pose a risk to the country's fiscal  outlook include national road agency Sanral (not rated), which is reported to  have revenue collection challenges with its Gauteng tolling system, and South  African Airways (not rated), which may be unable to obtain financing without  additional government support. While governance reforms have proceeded at the  airline, Eskom still has to complete its board appointments and appoint a  permanent CEO. Broader reforms to state-owned enterprises are still being  discussed and we do not foresee implementation in the near term.

South Africa continues to depend on resident and nonresident purchases of  rand-denominated local currency debt to finance its fiscal and external  deficits. We estimate that the change in general government debt will average  4.2% of GDP over 2017-2020. On a stock basis, general government debt net of  liquid assets increased to about 48% of GDP in 2017 from about 30% in 2010,  and we expect it will stabilize at just below 50% of GDP in the next three  years. Although less than one-tenth of the government's debt stock is  denominated in foreign currency, nonresidents hold about 35% of the  government's rand-denominated debt, which could make financing costs  vulnerable to foreign investor sentiment, exchange rate fluctuations, and  rises in developed market interest rates. We project interest expense will  remain at about 11% of government revenues this year.

South Africa's pace of economic growth remains a ratings weakness. It  continues to be negative on a per capita GDP basis. While the government has  identified important reforms and supply bottlenecks in South Africa's highly concentrated economy, delivery has been piecemeal in our opinion. The country's longstanding skills shortage and adverse terms of trade also explainpoor growth outcomes, as does the corporate sector's current preference to delay private investment, despite high margins and large cash positions.

South Africa's gross external financing needs are large, averaging over 100% of current account receipts (CARs) plus usable reserves. However, they are declining because the current account deficit is narrowing. The trade deficit (surplus in 2016) has seen contraction, but given the small recovery in oil prices (oil constitutes about one-fifth of South Africa's imports) we could see the trade balance weakening again. We could also see weaker domestic demand and a notable increase in exports from the mining and manufacturing sectors, along with a slower pace of increase in imports.

We believe sustained real exports growth is likely to be slow over 2017-2020 because of persistent supply-side constraints to production. Import growth will be compressed amid currency weakness and the subdued domestic economy. Therefore, we estimate current account deficits will average close to 4% of GDP over 2017-2020. However, South Africa funds part of its current account deficits with portfolio and other investment flows, which could be volatile. This volatility could stem from global changes in risk appetite; foreign investors reappraising prospective returns in the event of growth or policy slippage in South Africa; or rising interest rates in developed markets.

We consider South Africa's monetary policy flexibility, and its track record in achieving price stability, to be important credit strengths. South Africa continues to pursue a floating exchange rate regime. The South African ReserveBank (SARB; the central bank) does not have exchange rate targets and does notdefend any particular exchange rate level. We assess the SARB as being operationally independent, with transparent and credible policies. The repurchase rate is the bank's most important monetary policy instrument. Absent large currency depreciations, we expect that inflation will fall back below 6% this year and remain in the target range of 3%-6% over our three-yearforecast horizon.


The negative outlook reflects our view that political risks will remain elevated this year, and that policy shifts are likely which could undermine fiscal and growth outcomes more than we currently project.

If fiscal and macroeconomic performance deteriorates substantially from our baseline forecasts, we could consider lowering the ratings.

We could revise the outlook to stable if we see political risks reduce and economic growth and/or fiscal outcomes strengthen compared to our baseline projections.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
greenskeeper carl's picture

So taking land and businesses from the productive and handing it to people that haven't earned it is bad? Hmmmm. Someone should remind the american left of this apparently little known fact.

aPlayer's picture

Forex brokers who are currently facing difficult times are welcoming any pickup in volatility. Some market participants are saying that in 12 months time 50% of spot FX brokers could be out of the business while the remaining will get much stronger:

Soul Glow's picture

Back the Rand with gold you fucking idiots.

apadictionary's picture

where is the gold after western govts swindling it for centuries.

Rubicon's picture

The highest amount of un-mined gold is in SA. Allegedly. 

Anarchyteez's picture


With the policies they're rolling out? They just keep fucking themselves. SA=Venezuela now.

Donald J. Trump's picture

Amazing how these resource rich countries continue to fuck themselves (or get fucked, or fuck themselves by letting themselves get fucked??)

Soul Glow's picture

Venezuela has large reserves, but what types of reserves are they....not light sweet crude, the easy to refine, easy to sell oil.  And when it comes to South Africa, they have been mining for so long they peaked in production years ago.  China is now the world's largest gold miner.  Saudia Arabia shares a similar fate, as their wells have been drained for almost 90 years and no large replacements have been found for decades.  Mexico too.

See it's not what you have in the ground but what can you get out of it now, and is it any good that matters most.

Donald J. Trump's picture

Hence the use of the past tense word fucked.

Soul Glow's picture

Venezuela is not a resource rich country, and the others were formerly resource rich.  Hence my post.

Megaton Jim's picture

The nigger retards in South Africa will try to back it with waddymelon or something!

Donald J. Trump's picture

After they boot whitey they won't even have waddymelon.  The get rich  quick scheme in black farming is tobacco and they fuck that up too.

Anarchyteez's picture

Bye bye mining industry.

Bye gold.

Bye platinum.

Bye bye Jew diamonds.

Soul Glow's picture

One of these things is not like the others....

Diamonds are not rare, the others are.  If the mines are shut down this would decrease supply, vaulting price.  I for one welcome the shutdown of government mines.  Let's find out how much gold is really above ground.

SoDamnMad's picture

But they still have Oscr Pistorius.

ipso_facto's picture

'Junk' has nothing to do with Communist blacks being in power.

Donald J. Trump's picture

He he.  You should be in politics, or PR.

flaminratzazz's picture

Another example of niggers running things.

These backwards retards will be starving this time next year.

And the beauty of the complete Nelson Mandela tardfest is the stupid fvks wont even see it coming.

VK's picture

Overshoot followed by collapse. An age old story playing out once again. We are past the peak in resource quality as evidenced by higher production costs. All the countries that are failing are a sign of the global strain that is occurring. It really doesn't matter about race at this point, even Rome fell.

Is-Be's picture

The worship of Mandela was a classic case of hope triumphing over experience.

Anyone remember Zimbabwe?

Deep down the Nigerian colonials (What? Did the uBantu tell you that they are indigenous to South Africa? Has anyone asked for comment from the Hottentots or any of the San peoples?)

Anyway, deep down the iron age pasturalist colonials from West Africa do not share Western Ideals. That is the message of the National Song of South Africa " n'Kosi sikalela iAfrica" (God Save Africa). What they have in mind is mud huts and cattle. And raids for cattle, women and children, in that order. Winning Chief take all.  That is their ideal.

Winning chief takes all, and any criticism of The Chief is considered very rude indeed.

Are you beginning to feel the vast gulf that separates us from them? Probably not. How many times must your nose be rubbed in Reality before you see the light?

The Grim Teacher's picture

Kruger Rands are still legal tender in South Africa, pity they still think paper rands are money, and shame they aren't backing the paper with gold.

Winston Churchill's picture

I've seen a lot of Boers in Florida for a few years now.

He who panics first..........

Secret Weapon's picture

I would make some smart ass comment about how socialism destroyed their economy but I have a suspicion our own country is not far behind

83_vf_1100_c's picture

So, make your comment. Are we not a socialist country now?

That whole Apartheid is bad, Free Mandela thing has worked out well. /s

hibou-Owl's picture

This what happens when niggers get power hungry.

Everything turns to shit

20 tillion Obumer

holgerdanske's picture

Thank Zuma, bloody idiot.

Sterkbos's picture

This is not susprising for our country, which has enshrined economic and racial discrimination within its 'democratic and socially just' constitution, this is expected for a ruling party which is courting the populist vote by swinging hard to the left after their recent losses... even the communists are pulling their throbbing red members from the ring though, smelling upon Zuma the taint of the African dictator, a Mugabe in the making. 

As for our president, who is estimated to have more than 20 children, he wishes only to dig himself, his backers and his family deeper into a cocoon of safety, for if his ex-wife becomes president he might not have to face the hundreds of corruption charges leveled against him. The mere fact that this man is still leader attests to a system where self-interest is set too far above economic prosperity and the cowed/baying/racistly communist masses, most of whom have no conception of how important foreign investment and a sane fiscal policy is, vote with their hearts for their tribe. But no, continue onward oh glorious rainbow nation of mine! 

Is-Be's picture

I feel your pain.

This pain is brought about by the dissonance caused by your desire to serve two Ideals. Between your (Plural) desire to live in two worlds. The Western one and the Ideals of the aBantu.

What are the chances of bringing the masses to believe deep down in Western Ideals? Not good.

Here are your choices: The warmth (and material poverty) of the Bantu hearth or the cold ruthlessness (and material wealth) of Western Culture.

EDIT: And drop the Victimhood pose. You are not victims. You have got the very best continent in the World.

Sterkbos's picture


{The length of this ran away from me, I attempt even to explain things to myself}


(Firstly: The Afrikaans, English, Indian, Couloured and Chinese folk in SA I also count among the masses, many of them also play the political games of blame and sorrow and unfettered howling at the straw moon, or are part of the new anti-colonialist/communist wave that has a direct correlation with many universities and their courses as well as set policy of some entities who had affiliations with the Soviet or Chinese blocs during apartheid)


Ultimately "belief in western ideals" is not needed, no, the application of a system is not wholly dependent on the whims of the people as most democracies are not direct but representative or symbolic, depending on country. (I made an emotional error placing the blame firmly upon the shoulders of the masses. Basically, the people elect politicians and not the finance minister and the members of the treasury, with the fault then being the capacity of those politicians to choose inadeqaute fiscal policy setters or to strike the head of off effective fiscal policy and its banner-bearers within a night, also for them to court very unsound economic ideas on the basis of idealism or drumming up support). 



In can see how my pose was one of victimhood, even if I am in fact not a victim in any absolute sense(Other members of my culture, though, can be factually proven to have been harmed by the current system, just as many under apartheid have been, with the intensity of such harm varying on an individual basis with sweeping comparisons such as these). 


Anyway, because such a dramatized pose tends to sway the hearts of others, I took it up(This is after all the internet and I am an ape). As I am a relative layman where the collective modern economy and its various subsystems are concerned, I put on my acting cap and wailed into the wind with nothing substantive to add where the true  economic issues of the downgrading are concerned).


Regarding the "Bantu vs. Western ideals": Here I must vehemently disagree with you. There are a multitude of hearths in South Africa, with many obviously corrupt politicians, regardless of their culture or race, wrapped warm in the furs of their law-bending labours. Bussinesmen, regardless of culture, also enjoy prosperity if they know where to dig for it.  So too poverty is not an issue of race: From province to province you will find  Zulus, Afrikaners, Sothos, Xhosas, Griekwas, Ndebeles etc. etc. living in abject poverty.

Bluntly put, the "warmth and material poverty of the Bantu hearth" (Here I assume you mean existence as it was pre-colonialism, perhaps even before Arab contact on the Eastern coasts) is an ideal of the past that, and while still present in many African countries south of the Sahara it is increasingly less prevalent here ever since the 17th century, where the economic systems of subsistence herding/farming and especially the hunter/gather or pastoral cultures of the Khoi Khoi and Bushmen have been greatly influenced, infiltrated or outright destroyed by Western ideals or whatever you wish to call it.


Today, general success in SA is exactly dependant on a person's understanding of modern economic realities, of capitalist business models and their merging with traditional psychology and practices(I recall here a man who bought the skins from slaughtered cattle at funerals, ran a tidy profit and subsequently got filthy rich starting his own funerary business), English and Dutch-Roman law as well as politics within the frame of our parliamentary republic (Yes, language, culture and mentalities derived from them play a large role in all of the afformentioned systems but the economic system is still one which is at its heart capitalist). 


So: It is exactly the people who do not warm themselves by the leadwood fires of your Bantu hearth, the people who sit in their living rooms somewhere in Sandton warmed by electricity who constitute the majority of policy makers and movers and shakers in the modern South Africa. Those who still herd cattle and goats, those that farm hand to mouth, are mostly relegated to the countryside where they either subsist in their own micro-economies, or they are the workers in the mines and on the farms with little to no change in their economic state since the end of apartheid. (The cities and towns are another an more complex matter, I've already typed so much words here) (This is one thing in SA: Many are self-employed in the informal sector and this has an effect on the reported unemployment stats)


 The fact of the matter is, SA has a set economic tradition and we have people regardless of culture who are intelligent enough to make the country prosper within the global as well as domestic milieu. So the problem is one of politics and not race, where the people who can make things function or even function more effectively are axed, barred or trampled by the corrupt and their unelected backers (Guptas). 

JPMorgan's picture

SA assets for cents on the dollar.

Sparehead's picture

Is this not good? I keep hearing colonialization is/was awful, and now South Africa is once again much more like the rest of the continent. I figure in another decade they'll be fully "cured".

chickadee's picture

Rand was the go-to currency in Africa; just like the USD is the go-to currency in the world. Scarey.