Local markets may brush off S&P outlook change as the move was expected by most

A change in the outlook of SA’s sovereign credit rating by S&P Global Ratings and a warning of a possible further downgrade — should SA’s fiscal situation continue to decline — may leave markets unstirred on Monday, as analysts said the negative outlook, which was largely expected, would likely have a muted effect on the rand and local bonds.

S&P, which placed SA in subinvestment in 2017, changed SA’s outlook from stable to negative on Friday, citing the country’s deteriorating fiscal and debt trajectory.

“It will not have much of an effect on the market as S&P already has us on subinvestment grade,” said Rand Merchant Bank fixed income analyst Kim Silberman.

“If you look at the empirical analysis of the way that bonds trade, the big adjustment in asset prices happens when they move from investment grade to non-investment grade. Once you’re in the subinvestment sphere, moving down those notches really has a lot less impact on your assets prices.”

S&P warned that it could downgrade SA’s debt further if the country’s fiscal situation worsens, “for example, due to higher pressure on spending, rising interest costs, or the crystallisation of contingent liabilities related to state-owned enterprises, especially Eskom”.

“We could also lower the ratings if economic performance weakened further or if external funding pressures were to mount,” the ratings agency said.

“S&P would want to see how events play out in the February budget before they make any call beyond an outlook change,” Silberman said, adding that a downgrade from the B-range to Cs would likely result in a weakening in asset prices.

If the outlook had been upgraded to positive, that would have led to a bigger move in the market, but that was always unlikely, Herenya Capital Advisors’s Petri Redelinghuys said.

“Unless the government takes measures to control the fiscal deficit and we see sustained reform momentum, we view debt as unlikely to stabilise within our three-year forecast period,” S&P said.