S&P Rating Downgrade Repercussions: South Africa
Rationale – The outlook on all the long-term ratings is negative. The reasons for the recent changes are the heightened political and institutional uncertainties that have arisen from the recent changes in executive leadership. The next scheduled rating publication on the sovereign rating of South Africa will be on June 2, 2017.
The downgrade, according to S&P, reflects the view that the divisions within the ANC-led government that have led to changes in the executive leadership, including the finance minister, have put policy continuity at risk. This has increased the likelihood that economic growth and fiscal outcomes could suffer. In S&P’s view, higher risks of budgetary slippage will also put upward pressure on South Africa’s cost of capital, further dampening already-modest growth.
Furthermore, S&P predict that ongoing tensions and the potential for further event risk could weigh on investor confidence and exchange rates (already seen), and potentially drive increases in real interest rates. In conclusion, S&P highlight that South Africa’s pace of economic growth remains a major ratings weakness. They affirm that while the government has identified important reforms and supply bottlenecks in the country’s highly concentrated economy, delivery has been piecemeal at best.
S&P Outlook – The negative outlook reflects S&P’s view that political risks will remain elevated for 2017, and that policy shifts are likely which would continue to undermine fiscal and growth outcomes more than currently projected.
The Agency could revise the outlook to stable if a reduction in political risks is seen and economic growth and/or fiscal outcomes strengthen compared to the current baseline predictions.
South Africa’s exposure to the STF Fund remains high at almost 30 percent of the total Fund trade balance, as it has remained for the past 12 odd months.
In looking at the Metals & Minerals, Coal, Fruit & Raisins and Fertilizer commodities which are SA’s biggest exposures, the majority of these transactions tend to be export trade driven, and hence not as affected as import driven for an abovementioned outlook downgrade and pending currency depreciation. Where clients may face strong exposure to local currency volatility, there are hedging structures in place to address this, for protection of the borrower and ultimately Barak repayments (all in USD).
The forecasted increased local interest rates (that are likely to follow the forecasted inflation and Rand weakness) will impact the STF Fund by putting pressure on borrowers that have local bank facilities. While this could create an environment of opportunity for us in time, it could harm some borrower balance sheets in the short term, so we remain vigilant. Further diversification away from South African importers may be necessary if the medium to long-term outlook remains negative.
Barak: Political Outlook – Echoing S&P’s outlook on the future of South Africa’s economy given the volatile environment caused by recent governmental actions by the ANC-led party, Barak is wary that investor sentiment will continue to slip lower as the future ahead looks uncertain. On this basis however, Barak is committed to addressing the financing gap that is imposed on Africa and that has traditionally remained rife, which is now potentially spilling over into what has historically been the continent’s strongest country, South Africa.
Despite the negative outlook and strained connotations that come with recent actions inflicted by a volatile government, the opportunities remain within the country and Barak is optimistic of the operations within South Africa as seen by both current and prospective borrowers. The Fund Manager will look to introduce Political Risk Cover where deemed appropriate and commercially viable, however this sentiment does not detract from the fact that the space in which Barak continues to provide financing is a space within the country that will remain needful of continued trade finance support. The political uncertainty of the country does not change this need.