Ratings downgrade: A jargon buster

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But it is easy to get lost in all the acronyms and forecaster shorthand – what does it all actually mean?

There are three major credit rating agencies: S&P‚ Fitch Ratings and Moody’s Investors Service. While S&P and Fitch share the same vernacular‚ Moody’s speaks a slightly different language.

Ratings Scale

Fitch and S&P rate from AAA‚ the highest possible and only for entities or countries very unlikely to default on payments‚ to D which is the lowest rating.

A rating of D could mean the entity has filed for bankruptcy or that it has defaulted on a payment. A D rating is only given in the case of an actual bankruptcy or missed payment‚ whereas all the others are more of forecasts. Each rating may be accompanied by a “+” or “-” to distinguish relative standing.

Moody’s operates on a slightly different scale. The safest rating is Aaa and the riskiest is C‚ which means the obligation is “typically in default‚ with little prospect for recovery of principal or interest‚” according to the company’s website.

Moody’s uses the numbers 1‚ 2 and 3 as modifiers‚ with 1 indicating a higher relative standing and 3 indicating the lowest relative standing. So for example an Aaa1 rating would be better than an Aaa2 rating.

Investment vs. Sub-investment

There has been a lot of talk about South Africa now being considered sub – or non-investment grade‚ sometimes called “junk” status following S&P’s announcement.

According to Fitch and S&P‚ ratings from AAA to BBB are investment grade‚ meaning it is mostly safe to invest and there is little risk of default. Once a country is assessed at BB or lower‚ it is now considered sub-investment or “speculative‚” meaning there is much greater uncertainty for the future. This category is sometimes referred to as junk status.

At Moody’s‚ the change to from investment grade to junk occurs at Ba. Baa indicates “moderate credit risk‚” but Ba represents a speculative outlook and “substantial credit risk‚” according to the company handbook.

Why South Africa?

Speaking to Talk Radio 702 on Tuesday morning‚ Standard Bank economist Goolam Ballim said the ratings agencies trusted former Finance Minister Pravin Gordhan and that Malusi Minister Gigaba’s lack of economic credentials partly explain why credit ratings agencies and international markets are apprehensive.

“During much of 2016‚ there was a view‚ especially with the emergence of Minister Gordhan‚ that progressively‚ South Africa was making headway towards creating some level of stability‚” he said on the show.

“For example‚ there was a feeling that power was slowly shifting from the union buildings to Luthuli House.” Ballim also cited recent budgets from Gordhan that were “able to show the rating agencies and to the investor community that he was committed” to managing public finance in a “sensible and pragmatic way.”

Ballim said the “brazenness and startling nature” of last week’s reshuffle caused concern about the country’s economic stability.

“While this is not an indictment on Minister Gigaba‚ quite frankly Minister Gigaba has been given a role that at this present stage is far greater than his shoulders can bear‚” he said.

Previously‚ S&P rated South Africa in the BBB range‚ specifically BBB-‚ described as “exhibiting adequate protection parameters.”

However‚ the company announced Monday evening it was adjusting the country’s rating to BB+‚ the highest sub-investment grade‚ or junk status. In the accompanying press release‚ S&P explained its rationale: “The downgrade reflects our view that the divisions in 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.”

S&P said it could review South Africa’s rating if “if we see political risks reduce and economic growth and/or fiscal outcomes strengthen compared to our baseline projections.”

TMG Digital

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