South Africa Local-Currency Debt Rating Cut by Fitch

  • Move is technical adjustment that affected 23 other issuers
  • ‘Timely reminder’ of downgrade risks ahead, government says

Fitch Ratings downgraded South Africa’s local-currency debt one level to move it into line with the foreign-currency rating, bringing the nation’s 1.7 trillion rand ($118 billion) of domestic debt a step closer to junk level.

The cut to BBB-, the lowest investment grade, was part of a review of Fitch’s local-currency assessments, applying new criteria that resulted in downgrades for 23 issuers, the company said in a report that was first published on July 22. The outlook for South Africa’s rating was kept at stable.

“Although the action represents an alignment, it also serves as a timely reminder of the risks of a downgrade that lie ahead and the urgency of actions required to reinvigorate the economy,” South Africa’s National Treasury said in an e-mailed statement Tuesday.

Fitch kept its evaluation of South Africa’s foreign-currency debt at BBB-, one step above sub-investment grade, in June after cutting it a level in December. Moody’s Investors Service left South Africa’s credit rating at two levels above non-investment grade in May, while S&P Global Ratings kept its assessment at BBB-, one level above junk, last month.

“The work that we did in the first part of the year will now continue into the second part of the year to ensure that we avoid moving into junk investment grading,” Finance Minister Pravin Gordhan told reporters at a conference in Johannesburg on Tuesday, adding that he was confident that South Africa would avoid slipping into recession even as the central bank expects zero percent growth this year.

Debt Level

The nation’s government debt levels are rising as the plunge in commodity prices and slow global demand curbs tax revenue. Gordhan pledged in his February budget to narrow the fiscal deficit and limit gross debt to 50.5 percent of GDP by 2019 by curbing spending and raising taxes. About 90 percent of the government’s debt is rand-denominated, according to data compiled by Bloomberg. 

“It is somewhat concerning because a lot of the global bond indices, when they include you, they work off local currency ratings,” said Conrad Wood, head of fixed income at Aluwani Capital Partners in Johannesburg. “Now that the local-currency rating has been brought down in Fitch’s case to the same level as the foreign currency rating, by definition we’re a step closer to our local-currency rating going sub-investment grade.”

The rand was little changed at 14.3607 per dollar by 3:49 p.m. in Johannesburg. Yields on South African rand-denominated debt due December 2026 fell five basis points to 8.74 percent.

(Updates currency, bond yields in last paragraph.)
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