S&P changes South Africa's outlook to negative - TDS

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 4, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Guatemala) - Analysts at TD Securities noted that the first of the two rating reviews of South Africa scheduled for today was resolved with a change of outlook to negative from stable by S&P, and the affirmation of the BBB.

    Key Quotes:

    "The decision was not too surprising given the recent set of disappointing data and the ever slowing economy that expanded only by 1.0% Y/Y in Q3 2015.

    As a consequence, the market has been pricing in downgrades for a while. Relative to its split BBB-/BBB ratings, we estimate that the implied average ratings from the three main agencies (S&P, Moody’s and Fitch) is approximately 1.5 notches lower, which suggest sub investment grade levels.

    USDZAR reacted with a knee-jerk bounce to 14.40 from around 14.29, before the rand pared back half of these losses and currently trades around 14.37. This is still 0.2% stronger vs USD on the day, which signals the good ZAR performance in spite of the negative announcement.

    In their statement, S&P mentioned that slow growth, weak external demand, low commodity prices, electricity constraints, and weak business confidence that inhibit substantial private investment are the main reason for the outlook change. Yet, the Agency noted that the National treasury maintains its prudent fiscal consolidation, which should be conducive to net debt stabilizing around 45% of GDP in the 2015-2018 period.

    The external gaps have corrected this year on weak economic activity and low oil prices, but are expected to re-widen from 2016 as “the economic environment improves.” In fact, S&P expects GDP growth of 1.6% and 2.1% in 2016 and 2017, respectively, after likely ending 2015 at 1.4%. We expect +1.5% for both 2015 and 2016, but see more downside than upside risks, for which reason we are not optimistic on South Africa’s growth trajectory.

    In light of South Africa’s economic difficulties, and the possibility of further downgrades either today (a Fitch review is also scheduled for today and we expect a downgrade to BBB- with stable outlook) or in the near future, we continue to hold a negative view on the currency and bonds. We expect USD/ZAR to grind higher to 16.00 by the end of 2016."
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