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SA’s been downgraded, but is it fair?

You may have heard that South Africa has been “downgraded”.

Again?

Yup. There are three major rating agencies in the world. These are the names you keep hearing in the news: S&P, Fitch and Moody’s. They all have different grades, with weird names like BB+, etc. What you need to know is that you’re either at investment grade, or junk. Everything else is just degrees of difference, as you can tell from the below. So each new update you hear in the news is telling you how many notches we’re going up and down the scale. Sadly, we have mostly been going down for a while. Now we’re at “BB-” with S&P’s and Fitch, which is just above the dreaded “Very speculate credit”. (This thing has levels, see the graphic.) This puts us in the company of countries like Brazil and The Bahamas, which are lovely countries to visit, but not ones we want to emulate in terms of credit worthiness. We’d rather be like Botswana, the only A-rated African country by Moody’s. (And also a country that would be lovely to visit, no doubt.)

But weren’t we in junk status already?

Correct. S&P’s and Fitch had downgraded us into junk a while ago. But Moody’s, which has a soft spot for us, kept us at investment grade. In March this year, Moody’s did the inevitable and joined the other two. Being downgraded by all three effectively means a country is kicked out of something called “The World Government Bond Index”: an elite club of sort where one has access to really good interest rates on loans.

What is a credit rating exactly?

To put it very simply: a credit rating for a country is a lot like a credit score for you and I as individuals. The more likely you are to pay your loans, through good financial management, the higher your credit score.

This means you’ll get attractive interest rates, and the total cost of your loan is ultimately lower… freeing up more cash monthly to spend on other things.

South Africa has the opposite problem at the moment.

Now look, that’s a VERY simple way of putting it, so check out our full explainer here on rating downgrades to understand the whole thing. It’s quite readable, we promise. 😉

So we’re basically in deeper trouble.

Basically. Which is why South Africa Finance Minister Tito Mboweni keeps telling us how painful this is. It really is.

But, as Mboweni has also pointed out in his typically candid Twitter style, “you do not continue to beat up somebody who is on their knees”. Aren’t the ratings agencies being rather hard on us given the ONCE IN A GENERATION crisis the entire world is facing?

Yes and no, as it happens. SA hasn’t implemented the promised reforms fast enough BEFORE the pandemic, to stave off the downgrades. But at the same time, the agencies have been rather harsh on everyone.

As The Economist noted this week, according to Fitch’s own projections, governments with a junk rating may soon outnumber those classed as investment-grade.

Are rating agencies doing the right thing?

Some local politicians can be scathing of the rating agencies, but it’s ignorant to dismiss them out of hand: agencies are meant to be a reflection of our ability to pay back our loans, and it’s up to us to get it right.

That said, they’re not without fault. Reports by the European and US Commissions found evidence that their decisions worsened the 2008 global financial crisis, and they’ve been slammed for being at the centre of the financial markets collapse of New York City in the mid-1970s, the Asian financial crisis of 1997 – 1998, and the Enron scandal of 2001, as local academic Misheck Mutize has written. His writing on the topic here and here is an illuminating read into their shortcomings.

In our specific case… the agencies are not to blame for creating the crisis. In fact, Moody’s has been so patient with South Africa, that Financial Mail joked last week that when they “finally junked SA’s credit ratings — three years after S&P Global Ratings did the same — it was with the sigh of a long-wronged wife who has finally given up believing that her cheating husband will mend his ways”.

They are however, being incredibly heavy handed with their downgrades during Covid. There has been a record spike in rating downgrades across the world, as Reuters notes. Even countries like Italy are hovering uncomfortably close towards the junk status watermark, as we were before we were junked earlier this year. The number of countries at the prized “triple A” top rating is at its smallest proportion EVER for Fitch.

As Kerstin Engler, a senior wealth manager at Geneva Management Group, wrote in the Daily Maverick:

“One minor consolation is that South Africa is not alone in the economic challenges it faces. Most economies around the world are under pressure, facing something unprecedented. Knowing this, shouldn’t rating agencies put their decisions on hold in extraordinary circumstances?” she wrote.

It’s a very fair question.

What’s next?

It’s the same story every time we are downgraded. If we want to avoid a repeat we have to implement financial reforms, like taking care of BIG credit risks. Cough, Eskom, cough. Think about it: if you had a massive loan out already and were struggling to pay it off, you wouldn’t be considered a likely candidate for a favourable loan.

Until then, it’s going to be a while till we regain the golden credit rating we enjoyed during Thabo Mbeki’s tenure, before The Man from Nkandla ushered in the lost decade from 2009.

See below for our credit rating grading through the year, courtesy of Stanlib.