When the Rand was heading toward R12.30 last week, one had the sense that things were finally turning our way and the SA government had managed to avoid shooting ourselves in the proverbial political foot.

Then all hell broke loose when Zuma shuffled large swathes of his cabinet without consulting with the ANC, replacing many good performing ministers whilst keeping poorly performing ones. The portfolios most people were interested in though were those of Finance, where Pravin Gordhan was fired.

A recent BMI research note done before this event showed that SA was the 3rd most unstable Emerging Market (EM) next to Turkey. At the time, SA’s Long-Term political risk advantage over Turkey more than made up for her smaller short-term risk disadvantage over Turkey.

We have made a relatively conservative adjustment to SA’s positioning based on the latest political fiasco, which clearly puts SA behind Turkey on the EM risking rankings, in 2nd last place on the EM stability scale.

2nd last, 3rd last – it doesn’t matter. At the end of the day, SA’s political instability, lack of leadership and clarity of policy, corruption and inefficient administration make it a risky place to invest.

And it shows. As far as traders in Credit Default Swaps are concerned, SA is headed for a credit downgrade to Junk. The cost to insure SA’s debt versus junk-rated Turkey is the narrowest since October 2016:

And sure enough, following an emergency meeting over the weekend, on Monday afternoon ratings agency S&P moved to downgrade South Africa to sub-investment grade since it first attained investment-grade over 17 years ago. S&P knocked the foreign-currency rating to BB+, the highest junk score. The local-currency rating was reduced to BBB-, still investment grade, from BBB. The outlook on both ratings was kept at negative, signaling that the next move could be downward.

S&P said the executive changes initiated by President Jacob Zuma have put fiscal and growth outcomes at risk. “We assess that contingent liabilities to the state are rising,” the global ratings agency said in a statement on Monday. The agency said that political upheaval, including the sacking of finance minister Pravin Gordhan, was endangering the economy.

The junk bond rating means that it will be more difficult and more expensive for the SA government to borrow money in order to finance expansion plans. Many think a Junk rating will make our exchange rate far more volatile, which is going to make import/export businesses and those with large import costs harder to manage (Think SAA, ESKOM etc.). Colin Coleman, head of Goldman Sachs SA, said: “There’s only one thing I want to say: South Africans have President Zuma to thank for the downgrade”.

A downgrade need not lead to a market panic. Local currency bonds in which most government debt are denominated are still investment-grade, while JPMorgan’s Emerging Market Bond Index would not require asset managers to sell South African bonds even if they are labeled as junk. A hit to foreign-currency debt looks priced in – South African five-year credit default swaps already trade roughly in line with junk-rated states like Russia and Brazil, and investors already demand a bigger premium over Treasuries to hold South African dollar-denominated debt than Russia or Brazil, both junk credits.

Moody’s is due to make its latest pronouncement on South Africa’s credit rating on Friday 7th April 2017. It has the country two notches above junk status and its hard not to imagine them downgrading us at least one notch, even with their rose tinted glasses.

If you feel the Rand has made a new long term directional trend change for the worse and that the SA economy is likely to suffer, there are two JSE stock selection strategies we highlight for you in our most popular views article “SA TOP40 Offshore Exposure Revealed“. Similarly, if you view the worst has been priced in already, and that a mild SA economic recovery is likely to continue on the back of the new commodity bull market and general uptick in global growth, there are also two specific JSE stock picking strategies for you in that article.

If you would like to join our research staff and clients in our next round of 4 hour workshops where we discuss stock picking strategies for the JSE, or if you are interested in proffessional video recordings of these events, please contact megan@sharenet.co.za on 0860 240 240

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Dwaine van Vuuren

Retail-side Research

RecessionAlert, PowerStocks Research



Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.