SA approaching junk status - what it means

With continuing reports
that the SA economy is just
a tad off being rated as junk
status, everyone is expressing
concern.
But most laymen don’t
really know just what “junk
status” means in practical
terms.
And, as part of this band
of the ignorant, FTW asked
Luke Doig, senior economist
at Credit Guarantee
Insurance, to define this term
and what it will mean for the
economy.
“Simply put,” he told FTW,
“a sovereign rating of noninvestment
grade (so-called
‘junk’ status) is determined
by a particular rating agency’s
probability that a particular
country (or entity in the case
of a corporate rating) will or
won’t be able to meet their
debt obligations.”
And, Doig added, the
rule with many investment
institutions is that either a
country or an entity must be
ranked non-investment grade
by at least two agencies.
“Further, when becoming
non-investment grade,” he
said, “a country may/will lose
its inclusion in certain indices
(such as the MSCI emerging
markets
equity & bond
indices). This
in turn should/
will lead to
massive capital
outflows and
potentially
weaken the
currency.”
So, in short,
this has major
implications
for investment,
something
vitally required
given SA’s twin
deficits. “We
need to finance
the current account deficit by
attracting investment inflows,”
said Doig, “while financing the
fiscal deficit obviously incurs
a cost – a cost which usually
climbs steeply when junk
status is achieved.”
With Business Day reporting
that it apparently took India
about 16 years to escape junk
status, we asked how long it
took to re-emerge from junk
status, or re-attain investment
status.
Doig said it
depended on
the willingness
of the relevant
country to
put in place
policies that
appeased
rating agencies
(and investors),
showing
them that the
country’s debt
profile was
manageable.
With
President
Jacob Zuma
wielding an economically
destructive cudgel over the
supposedly festive season,
what bets are there on how
long it would take SA to prove
such manageability?
INSERT & CAPTION
‘Junk’ status is
determined by a
particular rating
agency’s probability
that a particular
country will or won’t
be able to meet their
debt obligations.
– Luke Doig