South Africa’s credit rating downgrade from BBB+ to BBB by rating agency Standard & Poor’s (S&P) last week leaves its sovereign rating only one notch above the agency’s lowest investment grade rating of BBB-, or two notches above the highest sub-investment grade rating.
The country is in safer territory with Moody’s Investors Service (at Baa1 after last month’s downgrade) and Fitch Ratings (BBB+ assigned in August 2005), which has yet to make a cut. In each case the rating is two notches above the lowest investment grade and three levels above the highest sub-investment grade.
Sub-investment grade securities are also known as speculative or, less politely, junk bonds. And borrowers find themselves in this territory when they have been booted out of investment grade by one or more credit rating agencies.
Ironically, the downgrades have come just after South Africa gained entry to the Citi world government bond index (WGBI). And one of the criteria for inclusion is a rating of A3 from Moody’s or A- from S&P. South Africa has never had an A- from S&P. And just ahead of the country’s debut on the WGBI, it was downgraded by Moody’s.
However, it will not be booted out of the club, according to Citi strategist Leon Myburgh. “The exit criteria now apply.” To fall out it will have to drop out of the investment grade entirely.
The penalty for achieving junk bond status is that pension and mutual funds and insurance companies – institutional investors – will no longer be allowed to invest in the country’s bonds. Without the strong stream of portfolio inflows from non-resident investors, South Africa will battle to fund its current account deficit. The deficit is the shortfall between revenue from exports of goods and services and the import bill.
South Africans are savings averse and deeply reliant on foreign savings to fund economic growth. Goodbye job creation.
Pick n Pay
The new man at the head of food retailer Pick n Pay, Richard Brasher, finds the diversity of South African consumers attractive and believes there is room to grow.
This, Brasher said, would no doubt put Pick n Pay back to where it used to be as one one of the best-performing supermarkets.
“[The] South African growth rate is impressive compared to the European market. I am optimistic about the future in this country and I hope to learn more about the diverse consumer.” He said consumers around the world were looking for value and were all under economic strain.
Brasher, who was not willing to put his neck on the line yet because he has just been appointed as chief executive, believes that Pick n Pay will certainly overcome its challenges.
“We are going through a transformation programme at the moment which has various changes associated with it. But I am confident that if we complete that in a way that it has been laid out then we would make a sharp turnaround,” he said.
Having been in the retail industry for about 26 years, Brasher said he enjoyed the competitive environment that came with the job and that he was willing to share the retail knowledge he had collected over the years at Tesco.
When asked about the competition, especially since Walmart’s entrance into South Africa, Brasher was quick to say: “Walmart, well it is a good business, and very effective in what they do, but having said that I have competed against Walmart in various markets, especially in the UK. I think it is a good competitor and it is possible to compete against it. I am new to the South African retail landscape but I am not new to the sector.”
SAA
For proof that the relationship between Public Enterprises Minister Malusi Gigaba and the SAA board had become utterly dysfunctional, you need look no further than Gigaba’s statement to the media made yesterday after the airline’s annual general meeting.
While Russell Loubser resigned from the SAA board a week or so before his colleagues, having despaired of the necessary guarantee being provided by the government in time to meet the September 28 deadline, the other seven held on in desperate hope until the very last minute, which was September 27.
Presumably they hoped that chairwoman Cheryl Carolus would be able to secure some last-minute reprieve. But none, apparently, was forthcoming.
And now it seems Gigaba had received the guarantee on September 26. But he decided to keep it a secret.
Could it have been that Gigaba had had enough of the old board – all of three years old – and wanted to put his stamp of authority on things at SAA? So he thought that playing hide-and-seek with the R5 billion guarantee would do the trick.
And so it did. Now he has his own board. And he has helped to highlight just why it is that being a state-owned entity makes life so difficult for the people who are actually trying to run it.
That said, judging from the limited amount of information available, financial 2012 wasn’t that bad for SAA – all things considered. And there are, of course, a lot of things to consider.
Most significant is the sharp hike in the price of fuel and to a lesser extent the steep payments for planes.
Airlines across the world, particularly those forced to do long-haul flights, are loss-makers and have limited scope to cut costs to turn a profit. SAA has the additional objective, determined by the government, that it should develop airline transport in Africa.
So all things considered, it is not doing too bad really.
Edited by Peter DeIonno. With contributions from Ethel Hazelhurst, Nompumelelo Magwaza and Ann Crotty.