D-day for S&P’s grading of South Africa

A FEARED credit downgrade for South Africa to “junk” could see direct investment in the ailing economy slide further as investors flee to other markets in search of higher returns.

Standard and Poor’s, which ranks Africa’s most-industrialised country just one step above sub-investment grade, is due to make its rating decision public today.

Some analysts believe a credit downgrade to sub-investment has already been priced into the currency, but they do not rule out a sell-off after the decision.

The Treasury says Fitch, which also puts South Africa’s credit one notch above speculative grade, will announce its decision on Wednesday.

“There may be some shortterm volatility, but I don’t see it going to R20 to the dollar,” said RAND WATCH: The rand looked vulnerable to a credit rating review from Standard & Poor’s due today. By 5pm it was bid at R15.5907 against the greenback. page 20

Lesiba Mothata, the chief economist at Investment Solutions.

“But if they move on the local debt or on the outlook, I think it’s ominous.”

The rand was trading at R15.5907 to the dollar by 5pm yesteray, down 26 percent since the beginning of 2015.

The currency tumbled to its worst ever level of R17.995 in January, a month after Fitch lowered South Africa’s rating to one step above sub-investment grade.

The weaker rand, combined with sluggish economic growth estimated at less than 1 percent this year, rising interest rates, low levels of consumer and business confidence and the looming downgrade have put off foreign investors.

Flows of foreign direct investment (FDI) into South Africa fell 64 percent, or R40 billion, between 2014 and 2015, according to data from the Reserve Bank.

The slide in FDI would continue due to the weak exchange rate triggering higher inflation and borrowing costs that ate away at both investor profits and business confidence, analysts said, warning that political upheavals had also cast a cloud.

“Currency risk is just a symptom of political risk. If the politics is sorted, currency risk will be mitigated,” said Azwimpheleli Langalanga, the economics fellow at the SA Institute of International Affairs.

A measure of global FDI confidence by consultancy AT Kearney last month said South Africa had failed to make the top 25 of destinations for investments, and fixed capital formation remained subdued as the economy edged towards recession. Some companies, including cement maker PPC and Nampak, are setting up new business units in other parts of Africa, seeking higher returns and protection against the weak currency. – Reuters