The cost of insuring South Africa’s dollar debt against default within five years suggest the nation’s rating with S&P should be one level lower than its current BBB, on par with the Philippines and Colombia, according to Rand Merchant Bank. The CHART OF THE DAY shows that South Africa’s CDS spread of 177 puts it in a league with countries rated BBB-, including Brazil and Russia, and almost 100 points above the Philippines.
“The odds of a downgrade are better than even,” Carmen Nel, a fixed-income analyst at RMB in Cape Town, said in a June 9 report. “The recent run of bad local data has resulted in ratings fears resurfacing.”
South Africa’s economy contracted in the quarter ended March for the first time since the 2009 recession as a 20-week platinum strike caused mining output to plunge by the most in almost half a century. S&P, which cited weak growth, labor unrest and rising government debt among reasons for maintaining its negative outlook on the nation in December, is scheduled to announce results of its sovereign review later today.
Fitch Ratings lowered the outlook on its BBB grading to negative from stable today, citing South Africa’s deteriorating growth prospects.
While the rand has weakened 3.3 percent against the dollar in the past month, partly due to investor speculation of a downgrade, rating actions don’t always trigger the market response that they signal. Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on more than 300 upgrades, downgrades and outlook changes since 1974 and through December 2012.
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