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Strictly Private and ConfidentialAn Authorised Financial Services Provider
South Africa Sovereign Credit Rating“Junk status” – running through the market risksRMB Global Markets Research25 November 2016
This is an updated and shortened version of the original that was published on 27 May 2016
Strictly Private and Confidential
Content
• RMB views on 4Q16 rating reviews
• What is priced vs. potential market impact of sub-investment grade?
• Short-term impact of rating outcomes
• South Africa’s rating history – How did we get here?
• How does South Africa stack up on the fundamentals?
• Return from junk
2
Strictly Private and Confidential
RMB views on 4Q16 rating reviews
• Key events:
• Moody’s rating announcement - Friday, 25 November 2016 (any time from 18:00 SA time, most likely 22:00 – 00:00)
• S&P rating announcement - Friday, 2 December 2016 (any time from 18:00 SA time, most likely 18:00 – 19:00)
• Fitch rating announcement - No regulated deadline
3
Current Base case Risk case
FC LC FC LC Probability FC LC Probability
Moody's Baa2/Negative Baa2/Negative Baa2/Negative Baa2/Negative 55% Baa3/Stable Baa3/Stable 45%
S&P BBB-/Negative BBB+/Negative BBB-/Negative BBB+/Negative 60% BB+/Stable BBB/Stable 40%
Fitch BBB-/Stable BBB-/Stable BBB-/Stable BBB-/Stable 75% BBB-/Negative BBB-/Negative 25%
Expected market impact from a downgrade by S&P from BBB- to BB+ on 2 December 2016:
• 5-y CDS: Short-term spike to 280bp - 300bp, expect level to settle back at 250bp in the medium term
• USD/ZAR: Short-term rise to 14.50– 15.00
• 10-y yield: Short-term rise to 9.30% - 9.50% recovery to 9.00% in the medium term
• Equities: Expect 1.5% weakness on the day, medium-term underperformance vs. peers
Strictly Private and Confidential
Rating developments this year
4
SA macro outlook Actual S&P Moody's Fitch
Agency projections 2015e 2016f 2017f 2016f 2017f 2016f 2017f
GDP (% y/y) 1.2 0.6 1.5 0.5 1.5 0.2 1.3
GDP per capita (US$) 5,759 5,145 5,320 5,300 5,417 n.a. n.a.
CPI (% y/y) 4.6 6.3 5.9 6.9 5.5 6.4 6.2
Budget balance/GDP (%) -3.9 -3.3 -2.9 -3.2 -3.0 -3.3 -3.0
Primary balance/GDP (%) -0.7 0.2 0.6 0.1 0.2 0.3 0.6
Gross debt/GDP (%) 51.0 52.2 53.0 51.2 50.5 53.0 53.3
Debt service/revenue (%) 10.6 11.2 11.3 8.9 8.9 11.6 11.9
Current account/GDP (%) -4.3 -3.6 -3.9 -3.5 -3.1 -4.0 -3.9
• Rating developments so far this year:
8 Mar 2016: Moody’s review for downgrade
6 May 2016: Moody’s affirmed the Baa2, outlook changed to negative
3 Jun 2016: S&P affirmed SA at BBB-/negative outlook
8 Jun 2016: Fitch affirmed SA at BBB-/stable outlook
18 Jul 2016: Fitch removes one-notch LC uplift
2 Aug 2016: Fitch reiterates BBB-/stable outlook
14 Sep 2016: Moody’s reiterates Baa2/negative outlook
Source: S&P, Fitch, Moody’s, RMB Global Markets
Strictly Private and Confidential
Rating “surprises”
Date Agency Rating event From To Outlook from Outlook to "Surprise" Pre-scheduled
Negative "surprises"
27-Sep-12 Moody's Downgrade A3 Baa1 Negative Negative Negative No
12-Oct-12 S&P Downgrade BBB+ BBB Negative Negative Negative No
10-Jan-13 Fitch Downgrade BBB+ BBB Negative Stable Negative No
13-Jun-14 S&P Downgrade BBB BBB- Negative Stable Negative Yes
06-Nov-14 Moody's Downgrade Baa1 Baa2 Negative Stable Negative No
04-Dec-15 S&P Unchanged BBB- BBB- Stable Negative Negative Yes
04-Dec-15 Fitch Downgrade BBB BBB- Negative Stable Negative Yes
08-Mar-16 Moody's Rating under review Baa2 Baa2 Stable Stable Negative No
Positive "surprises"
12-Dec-14 S&P Unchanged BBB- BBB- Stable Stable Positive Yes
12-Dec-14 Fitch Unchanged BBB BBB Negative Negative Positive Yes
05-Jun-15 Fitch Unchanged BBB BBB Negative Negative Positive Yes
06-May-16 Moody's Unchanged Baa2 Baa2 Negative Negative Positive No
03-Jun-16 S&P Unchanged BBB- BBB- Negative Negative Positive Yes
5Source: S&P, Fitch, Moody’s, RMB Global Markets
Strictly Private and Confidential
Market reaction to rating “surprises”
Positive surprises Negative surprises (excl Nenegate)
6Source: S&P, Fitch, Moody’s, Bloomberg, RMB Global Markets
A “positive” surprise, by design, occurs when the market is discounting adverse rating action and sells off ahead of the event. Historically, positive surprises had only a modest effect on the market on the day, but a more substantial impact in the month after the rating announcement.
In contrast, a negative surprise occurs when the market is not fully pricing in an adverse rating action. In this case the impact is most notable in the immediate wake of the event and during the subsequent month.
We think the market has partly priced out the risks associated with downgrades. In addition, the impact this time may be larger than historical experience suggests due to: 1) the rating being closer to sub-investment grade, and 2) the significant uncertainty to the global outlook and the elevated level in US bond yields.
-12-10
-8-6-4-202468
1-m pre 1-w pre 1-d post 1-w post 1-m post
bp R186 10-y 2-y 1y1y 5y5y 5-y CDS R210
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1-m pre 1-w pre 1-d post 1-w post 1-m post
% USD/ZAR ALSI
-30
-20
-10
0
10
20
1-m pre 1-w pre 1-d post 1-w post 1-m post
% R186 10-y 2-y 1y1y 5y5y 5-y CDS R210
-2.0
-1.0
0.0
1.0
2.0
3.0
1-m pre 1-w pre 1-d post 1-w post 1-m post
% USD/ZAR ALSI
Strictly Private and Confidential
SA history: Long-term foreign currency sovereign rating
Moody's 3 Oct 1994 Baa3 -
17 Jul 1998 Baa3 On Watch - Possible Downgrade
2 Oct 1998 Baa3 Confirmed
12 Oct 2001 Baa3 On Watch - Possible Upgrade
29 Nov 2001 Baa2 Upgrade
14 Oct 2004 Baa2 On Watch - Possible Upgrade
11 Jan 2005 Baa1 Upgrade
16 Jul 2009 A3 Upgrade
27 Sep 2012 Baa1 Downgrade
17 Jul 2013 Baa1 Affirmed
6 Nov 2014 Baa2 Downgrade
8 Mar 2016 Baa2 Rating under review for downgrade
6 May 2016 Baa2 Negative outlook
7
Fitch 22 Sep 1994 BB -
26 Oct 1995 BB -
5 Jun 1996 BB -
17 Feb 1998 BB Rating Watch positive
28 May 1998 BB -
19 May 2000 BB+ -
27 Jun 2000 BBB- -
21 Sep 2000 BBB- Stable outlook
20 Aug 2002 BBB- Positive outlook
11 Mar 2003 BBB- Rating Watch positive
2 May 2003 BBB Stable outlook
21 Oct 2004 BBB Positive outlook
25 Aug 2005 BBB+ Stable outlook
25 Jul 2007 BBB+ Positive outlook
17 Jun 2008 BBB+ Stable outlook
9 Nov 2008 BBB+ Negative outlook
17 Jan 2011 BBB+ Stable outlook
13 Jan 2012 BBB+ Negative outlook
10 Jan 2013 BBB Stable outlook
13 Jun 2014 BBB Negative outlook
4 Dec 2015 BBB- Stable outlook
8 Jun 2016 BBB- Stable outlook
Source: S&P, Moody’s, Fitch, SARB, I-Net Bridge, RMB Global Markets
S&P 3 Oct 1994 BB Positive outlook
20 Nov 1995 BB+ Positive outlook
6 Mar 1998 BB+ Stable outlook
25 Feb 2000 BBB- Stable outlook
12 Nov 2002 BBB- Positive outlook
7 May 2003 BBB Stable outlook
1 Aug 2005 BBB+ Stable outlook
1 Nov 2005 BBB+ Stable outlook
3 Nov 2005 BBB+ Stable outlook
11 Nov 2008 BBB+ Negative outlook
25 Jan 2011 BBB+ Stable outlook
28 Mar 2012 BBB+ Negative outlook
12 Oct 2012 BBB Negative outlook
13 Jun 2014 BBB- Stable outlook
4 Dec 2015 BBB- Negative outlook
3 Jun 2016 BBB- Negative outlook
Legend
Rating upgrade
Outlook revised upwards
Rating downgrade
Outlook revised downwards
Strictly Private and Confidential
60
70
80
90
100
110
-6
-5
-4
-3
-2
-1
0
1
2
1994 1998 2002 2006 2010 2014
Budget balance/GDP (%) Terms of trade (RHS)
1994 1998 2002 2006 2010 2014
S&P Fitch Moody's (RHS)A
A-
BBB+
BBB
BBB-
BB+
A2
A3
Baa1
Baa2
Baa3
Ba1
BB Ba2
SA rating history: Global vs. SA
Rating progression: DM vs. EM and SA SA ratings downgrades started in 2012
SA fiscal and commodity price dynamics SA CDS vs. CDS implied rating bands
8Source: S&P, Moody’s, Fitch, Macrobond, Bloomberg, RMB Global Markets
SA’s negative rating bias started in 2012. It has been closely monitored as part of the vulnerability of the economy to a sudden reversal in foreign capital inflows.
Since 2014, SA has diverged from the EM trend, becoming more closely aligned to high-risk/high-yield credits, such as Russia and Brazil.
While this has been partly due to the deterioration in commodity prices, the socio-political and economic climates have steadily worsened, escalating to ‘Nenegate’ in December 2015 and the fraud charges against Finance Minister Gordhan in October 2016.
‘Nenegate’ was the tipping point, cementing the prospect of sub-investment grade status after years of fiscal laxity and structurally weak growth in the wake of the global financial crisis of 2008-2009.
Active consolidation
Passive consoli-dation
Crisis management
Fiscal slippage
Sub-investment grade
0
2
3
5
6
8
2010 2011 2012 2013 2014 2015 2016
BB- BB BB+
BBB- BBB BBB+
A- A SA CDS
Strictly Private and Confidential
Credit rating agencies: Sovereign rating factors — SA
9
S&P
Institutional assessment
Moody’s Fitch
Economic assessment
External assessment
Fiscal flexibility & performance
Monetary score
Institutional & economic
profile
Flexibility & performance
profile
Indicative FC rating level
Institutional strength
Economic strength
Susceptibility to event risk
Fiscal strength
Economic resilience
Government financial strength
Indicative FC rating level
Structural features
Economic performance
External finances
Public finance
Indicative FC rating level
Source: S&P, Moody’s, Fitch, RMB Global Markets
Weakness(stable trend)Weakness(stable trend)
Neutral(stable trend)Neutral(stable trend)
Weakness(stable trend)Weakness(stable trend)
Neutral(stable trend)Neutral(stable trend)
LT FC: BBB-Negative outlook
LT LC: BBB-Negative outlook
H-H-
M+M+
M-M-
H-H-
H-H-
H-H-
A3 – Baa2A3 – Baa2
LT FC: Baa2Negative outlook
LT LC: Baa2Negative outlook
NeutralNeutral
WeaknessWeakness
WeaknessWeakness
NeutralNeutral
StrengthStrength
WeaknessWeakness
NeutralNeutral
BBB-BBB-
Debt burdenNeutralNeutral
BBB-BBB-
LT FC: BBB-Negative outlook
LT LC: BBB+Negative outlook
At max 2-notch LC upliftAlmost 12 months into 24 months negative outlook
timeline
Strictly Private and Confidential
SA rating peer group (S&P rating change since 24 May 2016)
10
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
South Africa India Morocco Kazakhstan Hungary
Russia Indonesia Bulgaria
Colombia Philippines Uruguay
Thailand Mexico Poland Peru
Botswana Malaysia
Brazil Croatia Bolivia Paraguay Guatemala Turkey
Vietnam Bangladesh
Underlined economies are EM, high-yield and/or commodity producersSource: Bloomberg, RMB Global Markets
Slovenia
Strictly Private and Confidential
World Bank Governance Indicator Rankings (2015)Government effectiveness
How does SA stack up: Institutional strength
S&P: Neutral
Moody’s: High-
Fitch: Neutral
Trend: Stable
SA’s credit rating continues to be supported by its institutional strength, which has remained above the peer group average. Even so, the most striking deterioration over the past 10 years has been in the ‘Control of corruption’, but this remains above the key country comparators.
Political news flows, legislative developments and court outcomes have had an increasing bearing on the ratings risk. So far the events have proven the resilience of SA’s institutions. However, while still viewed as favourable, institutional factors have not necessarily improved since May. Political interference with the National Treasury and/or the SARB will guarantee sub-IG should adverse developments re-occur.
11Source: World Bank, Moody’s, RMB Global Markets
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Baa average Ba average SA
-1.0
-0.6
-0.2
0.2
0.6
1.0
1996 1999 2002 2005 2008 2011 2014
SA governance history
Voice & accountability Political stabilityGovt effectiveness Regulatory qualityRule of law Control of corruption
0
20
40
60
80
Rus
sia
Turk
ey
Indo
n
Indi
a
Braz
il
SA
Voice & accountability
01020304050
Turk
ey
Indi
a
Rus
sia
Indo
n
SA
Braz
il
Political stability
0
20
40
60
80
Indi
a
Bra
zil
Rus
sia
Indo
n
SA
Turk
ey
Govt effectiveness
0
20
40
60
80
Indi
a
Rus
sia
Indo
n
Bra
zil
SA
Turk
ey
Regulatory quality
0
20
40
60
80
Rus
sia
Indo
n
Indi
a
Braz
il
Turk
ey SA
Rule of law
0
20
40
60
Rus
sia
Indo
n
Indi
a
Braz
il
Turk
ey SA
Control of corruption
Strictly Private and Confidential
How does SA stack up: Economic performance
GDP per capita (% y/y) GDP per capita: SA vs. peer groups (2017f)
CPI (% y/y) CPI: SA vs. peer groups (2017f)
12Source: S&P, RMB Global Markets
S&P: Weakness
Moody’s: Moderate +
Fitch: Weakness
Trend: Negative
SA fares poorly on growth, with the country having become poorer on a per capita basis over the past two years. SA falls well short of not only EM growth, but also DM growth and is well below the rating peer averages.
The growth deterioration and declining wealth in per capita terms has been the main factor behind the negative outlook by S&P, in particular.
Despite moderating inflation pressures, inflation remains high relative to the rating band means.
Any negative growth shock, whether global (e.g. commodities, China slowdown) or local (strike action, load-shedding, politics), would weaken the fiscal position and most likely lead to further downgrades.
-2
-1
0
1
2
3
4
2010
2011
2012
2013
2014
2015
2016
e
2017
f
2018
f
2019
f
BBB ave BB ave SA
-1012345678
SA
Bra
zil
Turk
ey
Rus
sia
BBB
ave
BB
ave
Indo
nesi
a
Indi
a
012345678
2010
2011
2012
2013
2014
2015
2016
e
2017
f
2018
f
2019
f
BBB ave BB ave SA
0123456789
BBB
ave
BB
ave
Indo
nesi
a
Indi
a
Rus
sia
SA
Bra
zil
Turk
ey
Strictly Private and Confidential
How does SA stack up: Fiscal performance
Gross government debt/GDP (%) Debt-to-GDP: SA vs. peer group (2017f)
Debt service/revenues (%) Debt service: SA vs. peer group (2017f)
13
S&P: Weakness
Moody’s: High -
Fitch: Neutral
Trend: Stable.
The debt ration is aligned with the BB average and above the BBB mean. While the ratio itself is not a pressure point, the rapid increase in the post-crisis period has raised the share of revenues being allocated to debt service. This is limiting fiscal space.
The government continues to delay the stabilisation and the turning point in the debt ratio amid serial growth disappointments.
Source: S&P, RMB Global Markets
30
35
40
45
50
55
2010
2011
2012
2013
2014
2015
2016
e
2017
f
2018
f
2019
f
BBB ave BB ave SA
5
6
7
8
9
10
11
12
2010
2011
2012
2013
2014
2015
2016
e
2017
f
2018
f
2019
f
BBB ave BB ave SA
0
5
10
15
20
25
Rus
sia
Turk
ey
BBB
ave
BB
ave
SA
Indo
nesi
a
Bra
zil
Indi
a
01020304050607080
Rus
sia
Indo
nesi
a
Turk
ey
BBB
ave
BB
ave
SA
Indi
a
Bra
zil
Strictly Private and Confidential
How does SA stack up: External vulnerability
Current account/GDP (%) Current account: SA vs. peer group (2017f)
Ext fin need/(CAR and usable reserves) (%) Ext fin need/(CAR and usable reserves) (2017f)
14
S&P: Neutral.
Moody’s: Moderate -.
Fitch: Weakness
Trend: Positive
SA has a persistent twin deficit problem with the current account and budget deficits large relative to the peer group averages. Funding is highly reliant on foreign flows, particularly into local currency debt. Despite significant rand depreciation, the current account deficit was unresponsive for a long time, showing more substantial narrowing only very recently.
While not viewed has a direct threat, the large ownership of domestic debt (35%) is a potential vulnerability should ratings actions be adverse enough to threaten index inclusion or the cross-over investor. The latter is a more immediate concern based on the threat to the foreign currency rating.
Source: S&P, RMB Global Markets
-7
-6
-5
-4
-3
-2
-1
0
2009
2010
2011
2012
2013
2014
2015
2016
e
2017
f
2018
f
2019
f
BBB ave BB ave SA
-5-4-3-2-1012345
Turk
ey SA
BBB
ave
Indo
nesi
a
Indi
a
BB
ave
Bra
zil
Rus
sia
80
100
120
140
160
180
200
220
2010
2011
2012
2013
2014
2015
2016
e
2017
f
2018
f
2019
f
BBB ave BB ave SA
020406080
100120140160180
Bra
zil
Rus
sia
Indi
a
Indo
nesi
a
SA
BB
ave
BBB
ave
Turk
ey
Strictly Private and Confidential
53
24 18
-17-29
-100
-50
0
50
100
150
200
1-m pre 1-w pre t=0 1-w post 1-m post
bp
Post-crisis ave Brazil Russia Bulgaria Hungary
CDS: Fully discounting sub-IG, but short-lived spike likely
SA vs. peer group* CDS differential 5-year CDS spread vs. average rating (bp)
CDS spread around sub-IG changes: long term CDS spread around sub-IG changes: short term
Since Nenegate, SA’s CDS spread has traded substantially wider than its EM rating peer group. The differential has averaged 100bp. Recently, this spread has narrowed to 70bp, signalling an outperformance of SA amid the reassessment of the EM outlook.
A BBB- average credit should have a CDS spread at 180bp, which is 70bp lower than where SA is trading. The 5-year CDS at 250bp is trading in line with a BB+ average long-term foreign currency rating and is therefore already adequately priced for an S&P downgrade. However, historical comparisons suggest there will be some widening on the day. We think the risk is for a notable spike given the recent spread compression, as well as the uncertain global market backdrop.
In the event of a sub-IG downgrade, we expect a short-term jump in the CDS spread, to 280bp - 300bp, but for a renewed narrowing in the subsequent months.
15Source: Bloomberg, RMB Global Markets
*Brazil, Turkey, Russia, Colombia, Mexico, Peru, Bulgaria, Hungary, Philippines, Poland
Post-crisis sample average change
ArgentinaBahrain
China
Costa Rica
Cyprus
Egypt
MalaysiaMexico
Nigeria
PakistanPortugal
Romania
South Africa
Tunisia
Turkey
Ukraine
0
100
200
300
400
500
600
700
8005-y CDS (bp)
Ave LT FC rating
AAA AA A BBB BB B CCC-100
0
100
200
300
400
500
2011 2012 2013 2014 2015 2016
bp Differential SA Peer group average
Marikana event
'Nenegate'
0
30
60
90
120
150
180
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 125-y
CD
S s
prea
d re
base
d to
100
at t
=0
Months from first sub-IG downgrade
Brazil Russia Bulgaria
Hungary Post-crisis ave SA
Strictly Private and Confidential
7.2 0.9
1.7 0.6
-1.2
-15-10
-505
1015202530
1-m pre 1-w pre t=0 1-w post 1-m post
%
Post-crisis ave Brazil Russia Colombia Bulgaria Hungary
FX: Expect weakness on sub-IG, USD/ZAR settling around 14.50 -15.00
SA vs. peer* group exchange rate performance Breakdown of rand drivers
FX movements around sub-IG changes: long term FX movements around sub-IG changes: short term
The rand has generally outperformed the EM peer group since the start of the year. It underperformed by 5% in the wake of the US election, but has recouped half the losses since the middle of November.
On a cumulative basis, SA-specific factors have now accounted for c. 25% of the depreciation since the start of 2010. The US dollar has returned as the key driver of rand pressures.
The recent rally in the exchange rate has resulted in a substantial part of the risk premium being priced out. While the rand is still undervalued, a sub-IG downgrade could push the rand to 15.00 versus the US dollar.
16Source: Bloomberg, Reuters, RMB Global Markets
*Brazil, Turkey, Russia, Colombia, Mexico, Peru, Bulgaria, Hungary, Philippines, Poland, Uruguay, India, Indonesia
Post-crisis sample average change
70
110
150
190
230
270
2010 2011 2012 2013 2014 2015 2016
1 Jan '10 = 100
SA/peer groupRand vs. US$Peer group average (vs. US$)
Marikana event 'Nenegate'
40
70
100
130
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
10-y
yie
ld re
base
d to
100
at t
=0
Months from first sub-IG downgrade
Brazil Russia Bulgaria
Hungary Post-crisis ave SA
Strictly Private and Confidential
60
054
-59-28
-150
-100
-50
0
50
100
150
200
1-m pre 1-w pre t=0 1-w post 1-m post
bp
Post-crisis ave Brazil Russia Bulgaria Hungary Romania
Yields: Limited risk premium, 10-y at 9.50% - 10.00% on sub-IG
Local currency 10-y yield vs. peer* group FX vol adjusted 10-y yield vs. average rating
Yield vs. JPM GBI-EM Yield vs. peer group
Since Nenegate, the SA 10-year local currency yield has traded an average 230bp above the peer-group mean. The latest differential is 223bp, which is in keeping with the overall trend and suggests there is no additional risk premium priced. The differential reflects mostly political risk, but also high exchange rate volatility. Adjusted for FX vol, the 10-year yield does not stand out as particularly undervalued.
The market had priced in downgrade heading into the June review, but this time the underperformance has been less pronounced.
We expect a 30bp - 50bp jump in the 10-year yield on a sub-IG rating, with the yield gradually returning to 9.00% after the short-term over-shoot.
17Source: Bloomberg, Macrobond, RMB Global Markets
30
60
90
120
150
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
10-y
yie
ld re
base
d to
100
at t
=0
Months from first sub-IG downgrade
Brazil Russia CroatiaBulgaria Hungary Post-crisis aveSA
*Brazil, Turkey, Russia, Colombia, Mexico, Bulgaria, Hungary, Philippines, Poland, India, Indonesia
Post-crisis sample average change
Chile
Cyprus
Hong Kong
Hungary
India
Italy
Japan
PeruPhilippines
Portugal
Spain
0102030405060708090
100
FX-adj 10-y yield
Ave LT FC rating
AAA AA A BBB BB B -50
0
50
100
150
200
250
300
350
5
6
7
8
9
10
11
2010 2011 2012 2013 2014 2015 2016
bp%
Differential (RHS) Peer group average SA
'Nenegate'Marikana event
Strictly Private and Confidential
70
110
150
190
230
270
2010 2011 2012 2013 2014 2015 2016
1 Jan '10 = 100
SAPeer group averageSA/peer group
Marikana event 'Nenegate'
0.40.6
-1.41.9
3.5
-10
-5
0
5
10
15
1-m pre 1-w pre t=0 1-w post 1-m post
%
Post-crisis ave Brazil Russia Colombia
Bulgaria Hungary Egypt
Equities: Weak macro backdrop being priced, rating impact short term
SA equities vs. peer group SA fixed-rate credit spreads
Equity index around sub-IG changes: long term Equity index around sub-IG changes: short term
SA equities have underperformed the EM peer group since the middle of 2016. The appreciation in the exchange rate countered the benefit from a rebound in commodity prices. Moreover, political uncertainty has resulted in foreign portfolio disinvestment. Finally, margin squeeze has finally taken hold amid a weakening backdrop.
Notwithstanding the underperformance, the market is not assigning a meaningful risk to a sub-IG downgrade. Hence, we would expect a short-term drop of around 1.5% in the market, but a steady recovery in the subsequent months. This would be in line with historical experience in other Ems.
18Source: Macrobond, RMB Global Markets
*Brazil, Turkey, Russia, Colombia, Mexico, Bulgaria, Hungary, Philippines, Poland, India, Indonesia
Post-crisis sample average change
0
50
100
150
200
250
300
350
Jan-05 May-07 Sep-09 Feb-12 Jun-14 Nov-16
bp Financial senior Financial subordinatedInward CorporateSOEs Municipal
60
80
100
120
140
160
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12MS
CI b
road
inde
x re
base
d to
100
at t
=0
Months from first sub-IG downgrade
Brazil Russia BulgariaHungary Colombia SAPost-crisis ave
Strictly Private and Confidential
IG to sub-IG…and back again
Comparison of sub-IG movers per agency
S&P sample of sub-IG movers
Based on historical ratings by the main credit rating agencies, S&P is the most pro-active on ratings downgrades to sub-IG.
For S&P and Moody’s around two thirds of the downgraded sovereigns remain in sub-IG, with a third regaining IG status. Fitch is more forgiving, with just shy of half the countries remaining sub-IG, while returns to IG are more frequent (almost 50%).
This discrepancy is also reflected in the average number of years to regain IG status from the first sub-IG move: 7 years for S&P, 10 years for Moody’s and 5 years for Fitch.
This supports the findings on the accuracy and stability, in particular the “stickier” view by Moody’s on sovereigns. On the positive side, this means they will be very considerate in downgrading SA to sub-IG, but once there it will be difficult to regain IG status.
19Source: S&P, Fitch, Bloomberg, RMB Global Markets
Sub-IG, no default Sub-IG, default Not rated Regained IG, no default Regained IG, defaultAzerbaijan Cyprus Libya Colombia Uruguay
Bahrain Greece Tunisia India
Barbados Indonesia Latvia
Brazil Venezuela Romania
Bulgaria Slovak Republic
Croatia South Korea
Egypt Hungary
Portugal
Russia
Turkey
S&P Moody's Fitch
Number of countries that have lost IG status 24 18 19
Of these:
Number still in sub-IG without default 10 11 7
Number still in sub-IG with default 5 0 1
Number no longer rated 2 0 1
Number to have regained IG without default 7 6 9
Number to have regained IG with default 1 1 1
Average time to regain IG status from date of loss (years) 7.2 10.3 5.4
Strictly Private and Confidential
IG to sub-IG: Country detail
Country
Date of first sub-IG downgrade (by any
of the big three CRAs)
Date of S&P downgrade To
Number of notches on first S&P sub-IG
downgradeWorst S&P rating Current S&P rating
Azerbaijan 29-Jan-16 29-Jan-16 BB+ 1 BB+ BB+
Bahrain 17-Feb-16 17-Feb-16 BB 2 BB BB
Barbados 17-Jul-12 17-Jul-12 BB+ 1 B B-
Brazil 09-Sep-15 09-Sep-15 BB+ 1 BB BB
Bulgaria 12-Dec-14 12-Dec-14 BB+ 1 BB+ BB+
Colombia 11-Aug-99 21-Sep-99 BB+ 1 BB BBB
Costa Rica 16-Sep-14 n.a. n.a. n.a. BB-
Croatia 14-Sep-12 14-Sep-12 BB+ 1 BB BB
Cyprus 13-Jan-12 13-Jan-12 BB+ 2 SD BB
Egypt 22-May-02 22-May-02 BB+ 1 CCC B-
Greece 27-Apr-10 27-Apr-10 BB+ 3 SD B-
Hungary 24-Nov-11 21-Dec-11 BB+ 1 BB BBB-
Iceland 05-Jan-10 n.a. n.a. n.a. BBB+
India 29-May-91 29-May-91 BB+ 1 BB BBB-
Indonesia 21-Dec-97 31-Dec-97 BB+ 1 SD BB+
South Korea 22-Dec-97 22-Dec-97 B+ 4 B+ AA
Latvia 24-Feb-09 24-Feb-09 BB+ 1 BB A-
Libya 01-Mar-11 10-Mar-11 BB 4 NR NR
Malaysia 09-Sep-98 n.a. n.a. n.a. A-
Portugal 05-Jul-11 13-Jan-12 BB 2 BB BB+
Romania 27-Oct-08 27-Oct-08 BB+ 1 BB+ BBB-
Russia 26-Jan-15 26-Jan-15 BB+ 1 BB+ BB+
Slovakia 20-Mar-98 17-Sep-98 BB+ 1 BB+ A+
Thailand 21-Dec-97 n.a. n.a. n.a. BBB+
Tunisia 23-May-12 23-May-12 BB 2 NR NR
Turkey 13-Jan-94 22-Apr-94 BB 2 B- BB
Uruguay 14-Feb-02 14-Feb-02 BB+ 1 SD BBB
Venezuela 28-Mar-83 28-Mar-83 BB 5 SD CCC
20Source: S&P, Fitch, Bloomberg, RMB Global Markets
Strictly Private and Confidential
Strictly Private & Confidential
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June 2014
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