Ratings agency Standard & Poor’s (S&P’s) decision to downgrade South Africa’s credit rating to junk status, will adversely affect the cost and availability of capital, economist Iraj Abedian said on Tuesday.
“Before the downgrade, the South African government and all sub-national entities, private and public, were allowed to borrow through their bond-issue from the capital market,” he said at the 2017 Proudly South African Buy Local Summit on Tuesday.
He noted that, prior to the downgrade, many institutions would have happily bought those bonds if, the price was right.
“Now, price is no longer the deciding factor. It depends on whether or a not a company is allowed to invest in a jurisdiction that has junk status,” he explained.
He further noted that the predominant majority of pension and provident fund investors across the globe are not permitted to invest in junk status jurisdictions.
“Those that already are invested in South African government bonds, such as Eskom and Transnet, have to start pulling out,” he said.
He added that the downgrade meant that the pool of investor markets will now shrink dramatically, while the cost of accessing capital will increase heavily.
He added that international companies that have credit bonds with South Africa have, from Tuesday morning, been cut because they are not allowed to deal with banks that are in subinvestment-grade jurisdictions.
“This is the beginning of the capital market tsunami, and we will see the consequences of the downgrade in the months and weeks ahead, depending on how we respond to it.”
Meanwhile, speaking to Engineering News Online on the sidelines of the event, Nissan South Africa human resources director Nabiel Conybeare said the South African automotive industry should be worried about the downgrade.
“If the consumer doesn’t buy vehicles, the manufacturing, and more specifically, the automotive industry, will be under threat,” he said.
He added that the South African automotive sector saw a decline in previous years; however, before the downgrade, there had been an uptick in the early months of this year.
“One cannot predict what is going to happen but [the downgrade] will influence the market. We need to look at, and study what, the real impact of it will be. There are many assumptions, but we can’t say for sure what the impact will be,” he said.
He added that South Africa’s banking and fiscal sectors were fairly strong, as was proven in the 2008 recession, noting that he was hopeful that that strength would carry through.
“As Nissan, I would be naïve to say we are not worried about the potential impact; it could have a very serious impact, but we are not at that point yet and we will hopefully stabilise quickly and get back on track.
“We should wait and see how the other ratings agencies rate South Africa and focus on navigating our way through this turmoil.”