Credit ratings South Africa's debt already priced for junk as growth slows

Africa's most industrialised economy is seen at risk of losing its investment-grade status because of persistently weak growth and large deficits. Many investors are also unhappy with President Jacob Zuma's handling of the economy.

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An expected cut in South Africa's credit ratings to "junk" grade is already being priced in by investors who are increasingly shunning the country's financial assets.

Africa's most industrialised economy is seen at risk of losing its investment-grade status because of persistently weak growth and large deficits. Many investors are also unhappy with President Jacob Zuma's handling of the economy.

A change in ratings to speculative grade, known as "junk", typically leads to a sharp rise in borrowing costs. That would be bad news for South Africa, whose debt servicing needs are already projected by the Treasury to rise to nearly 180 billion rand ($12 billion) in 2018-19.

But South African dollar debt trading in JP Morgan's Emerging Markets Bond Index is already yielding more than that of countries with similar credit ratings, such as Romania or India, and even some lower-rated peers like Russia and Turkey.

"A lot of things that people say would happen if we are downgraded, have already happened," NKC African Economics analyst Francois Conradie said. "A lot of capital left the country in the second half of last year, especially in December."

"Even at investment-grade we are already paying as much as other countries that are sub-investment grade -- it's like we have already been downgraded."

South African bonds in the EMBI Global index were trading at a premium of 410 basis points over U.S. Treasuries on Friday, while Russian bonds traded at just 274 basis points.

The cost of insuring South Africa's debt against default has also leapt, with its five-year credit default swaps trading at 318 bps on Friday, according to Markit, versus 289 bps for Russia and 258 bps for Turkey.  

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