Junk rating - SA could face 12-year recovery

If Standard and Poor’s
downgrades South Africa to
junk status in December, it
could take up to 12 years for
the country to claw its way
back to investment bond
status.
This was the warning
from Trade Advisory
economist, Martin
Cameron, who addressed
delegates at the KZN
Export Summit 2016 in
Durban last week.
“International research
has shown that where a
country goes into junk box
status, if that economy has
a concerted plan to work on,
it takes between eight to 12
years to get out again so it
is a very serious risk to this
country and economy in the
next two months,” he said.
He added that if the
downgrade went ahead,
it would have a domino
effect as international
institutional portfolio
investors would be forced
to follow their rules to
disinvest in a junk status
country.
“This is not something an
individual trader or investor
in an institution can simply
override. The moment you
go into junk bond status,
most of the rules state that
you take your money out
of that country and put it
where it is better rated. And
the returns will be better so
there will be an automatic
outf low based on these rules
– never mind people making
decisions."
However, he added that
big investors were already
proactively managing their
risk and closing down
funding lines to firms like
the Industrial Development
Corporation (IDC),
Transnet and Eskom.
“They are not happy in
terms of their performance
but it will just be
aggravated once the country
gets a downgrade,” he said.
The implications for the
economy were that there
would be less funding for
infrastructure project
spending and it would be
more expensive to borrow
funds internationally. And
he pointed out that there
was no simple solution to
working on getting out of
junk status. It took India 12
years to recover.
“There are many
fundamental reasons why
we will be downgraded
– weak governance,
perception of so-called
state capture, perception
of no political will to do
certain things, and the kind
of environment the labour
force is allowed to impose
on the economy. And the
‘fees must fall’ protests are
not doing us any favours,”
he said.
“As these things start
synchronising you start
getting a perception
formed in the international
community that things are
not going so well in SA,” he
said.
Cameron added that
the Brics (Brazil, Russia,
India, China and SA) bloc
was pushing to establish its
own ratings agency as the
countries disagreed with
the western world view of
rating.
“It is always good to
have alternative views
and choice but we will
only know whether it is
a good or bad thing once
we see how they rate and
how you need to interpret
that rating,” Cameron said.
S&P is expected to deliver
its ratings review on
December 2.