American credit rating agency, Fitch, announced on September 24 that it has downgraded Zambia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from &#8216;CC&#8217; to ‘C’. The country’s senior unsecured foreign currency bonds were also downgraded this week.



This follows the Zambian government issuing a &#8220;consent solicitation&#8221; to holders of three global bonds (Eurobonds) on September 22, requesting a suspension of debt service payments for six months. This would effectively be covering the upcoming three coupon payments due on October 14, and January and March 2021.



Zambia’s Ministry of Finance stated that the country has been confronted with challenging macroeconomic and fiscal situations aggravated by the Covid-19 crisis. This has severely impacted the country’s public finances.



“A combination of declining revenues and increased unbudgeted costs caused by the Covid-19 pandemic has resulted in a material impact on the Government’s available resources to make timely payments on its indebtedness leading to increasing debt-servicing difficulties,” Fredson Yamba, Secretary to Treasury, said in a statement on Tuesday.



In its report, Fitch stated that should bondholders agree to the suspension in payment, this would constitute a distressed debt exchange (DDE).



“The authorities have indicated that they will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached. However, Fitch judges that there is a high risk of a missed debt payment over the forecast horizon,” Fitch said in its press release.



The Zambian government further said in a statement that they are still engaging with the International Monetary Fund (IMF) to secure financial assistance. The government hopes to create a program of reforms that would help in stabilizing the macroeconomic outlook of the country and restore its fiscal balance.



“In this context, the government is committed to finding a consensual and collaborative resolution to the debt sustainability issues it is currently facing,” Yamba said.



The ‘CC’ rating, which occurred on April 16, due to the sovereign’s constrained external liquidity exacerbated by the pandemic, meant that the country was left in a highly vulnerable position, financially. How will this newly downgraded rating bode for Zambia now?



“The downgrade of Zambia&#8217;s rating reflects Fitch&#8217;s view that a default event is imminent.”

Graph Falling Down in Front Of Zambia Flag. Crisis Concept

Zambia’s Credit Rating Downgraded to Near Junk Status

Credit ratings agency Moody&#8217;s has downgraded South Africa to junk status on day 2 of the country&#8217;s nationwide lockdown. 



President Cyril Ramaphosa&#8217;s economic reform plans have been slowed by the coronavirus pandemic. The downgrade adds salt to injury for South Africa as it currently struggles with a recession it slipped into in early March. 



&#8220;The unprecedented deterioration in the global economic outlook caused by the rapid spread of the coronavirus outbreak will further exacerbate South Africa’s challenges&#8221; said Moody&#8217;s.

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Moody’s Downgrades South Africa To Junk

On April 3, the rating agency Standard &amp; Poor’s Global (S&amp;P) downgraded South Africa to junk status following the reshuffling of several cabinet ministers, including finance minister Pravin Gordhan and his deputy Mcebisi Jonas. President Jacob Zuma’s reshuffling received mixed reaction from the people, but even worse, the downgrade that followed rocked the country’s markets. And more was to come; four days later, Fitch Ratings announced the second downgrade.
Azar Jammine, Chief Economist at Econometrix, says the downgrades can hurt the economy in three ways.
<div id="attachment_5619" style="width: 310px" class="wp-caption alignleft"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-5619" class="wp-image-5619 size-medium" src="/wp-content/uploads/2017/05/march-047-300x201.jpg" alt="" width="300" height="201" />Zuma must fall protest</div>
“When business confidence is low, businesses don’t invest in capital formation. If you reflect on what happened in 2016, the economic growth rate was just 0.3% but when you look at the breakdown thereof you see that consumer spending grew by nearly 1%, government spending grew by nearly 2%, exports exceeded imports, so why was growth why so low? The answer is because capital investment fell by 4%, and one fears that we are going to see more of this going forward,” he says.
“People are focusing a lot on the impact on the rand, but in fact that’s neither here nor there. All that happened thus far the rand has retraced some of the gains that it made in January and February. At this current exchange rate, the impact in boosting inflation and interest rates will not be too severe. What is has done is to get rid of any hope of a cut in interest rates, and to that extent has dampened the business confidence.”
“The third way in which downgrades are likely to impact negatively is through the increase in the long-term interest rate which is going to raise government’s cost of servicing its debt. Government and parastatals have to borrow R260 billion ($19 billion) or about 5.5% of GDP in the coming year. Now, already, long term interest rates have risen by 50 basis points and the impact on cost of servicing debt in the longer term will be substantial, around R15 billion ($1.1 billion) to R20 billion ($1.45 billion), which will be taken away from the ability of government to spend on all sorts of vital areas of infrastructure and social requirements.”
Jammine isn’t writing off any possibility of a third downgrade from  credit rating agency Moody’s. He doesn’t expect to see improvement under the new Minister of Finance, Malusi Gigaba, who has little experience in finance.
“If the new minister carries on the way he has about the radical economic transformation, then that dashes the hopes of credit agencies regarding adherence to fiscal discipline. The moment you have that, the ratings agencies are going to downgrade you, and that’s a big concern. If S&amp;P and Moody’s local currency debt decline to junk status, then South African government bonds will fall out of the Citigroup World Government Bond Index.”
Iraj Abedian, an economist and CEO at Pan African Investments and Research Services, also has doubts about Gigaba.
<div id="attachment_5618" style="width: 310px" class="wp-caption alignleft"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-5618" class="wp-image-5618 size-medium" src="/wp-content/uploads/2017/05/march-17-300x201.jpg" alt="" width="300" height="201" />Zuma must fall protest</div>
“He’s been a weak leader in the ministries he led before and his current comments on the downgrades have been contradictory. It seems he doesn’t understand the gravity of the problem, he has little time to allow himself to learn basic economics, but we can hope he transforms himself for the benefit of the country and the people,” he says.
Abedian says South Africa can return to normality within five years only if Gigaba doesn’t listen to clueless politicians and rather pays attention to the markets’ demands.
Jammine, however, says we haven’t seen the worst yet. There’s a huge burden on Gigaba to try and convince the markets that he’s not going to go crazy with government spending. He fears the new minister doesn’t understand the implications.
“First, he said you don’t go and downgrade a country just because of the change of one person, and then after that he said he knew about the downgrade, so the statements were totally contradictory. In the same way, he says we are going to be committed to radical economic transformation and then argues that we are committed to fiscal discipline, this also tends to be contradictory.”
If the minister cannot heed to the advice of economists, there’s a risk of a long spell of recession and social upheaval as the living standards of ordinary people in South Africa deteriorates, says Jammine.
Ordinary South Africans are aware of the damage that Zuma’s reshuffle has done. More than 100,000 marched on the streets to show the president their displeasure.
“It’s bad news as the people started to ask whether South Africa is going the route of Zimbabwe or Venezuela, for example,” says Jammine.
“What you have right now is a huge divide between what the president himself has termed ‘clever blacks’ and white monopoly capital, who are seen to do all this to benefit themselves. They are being accused of making a big brouhaha about the ratings downgrades in order to persuade people the impact would be bad for the poor. The reality is that it would be worse for the poor than the middle [and] upper income groups because a fall in the value of the rand tends to push up the share prices of the companies listed on the stock exchange that have huge investments overseas. Secondly, higher interest rates improve the returns on pensions people hold. So pensioners and those who have a lot of shares will do well out of this.”
The South African Reserve Bank Governor Lesetja Kganyago lambasted politicians who questioned the credibility of rating agencies when they should be taking the people into their confidence.
“We are going to engage the credit ratings on their own terms. When you lose your investment grade ratings, your government is going to pay more to raise debt and when your government does that, your banks are going to pay more to raise debt and they will pass those costs to businesses and household and then it doesn’t become nice. It is going to affect the poor and the middle class who rely on credit,” says Kganyago at the monetary policy forum.
Jammine agrees the poor will suffer from this as there will be job losses and rises in inflation. So, what can the government do?
“The best thing the government could do is reinstate Pravin Gordhan and Mcebisi Jonas, or to put someone in Gigaba’s place. Gigaba has a very poor reputation in the way he managed the ministries of public enterprise and home affairs previously.”
“You may shout about the credibility of the agencies until the cows come home, the fact is the international investors do pay attention to these credit rating agencies… you can try and pretend they don’t count, but they will cost you a lot of money.”
Despite the upheaval seen on the streets, it is not the first time South Africa has faced economic meltdown and certainly won’t be the last. In 1994, the new government inherited a treasury with huge amount of debt that rose sharply as a result of a massive increase in defence spending.
<div id="attachment_5624" style="width: 310px" class="wp-caption alignleft"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-5624" class="wp-image-5624 size-medium" src="/wp-content/uploads/2017/05/AnitZumaMarch_JC-3-300x200.jpg" alt="" width="300" height="200" />Zuma must fall protest</div>
“Nelson Mandela and his minister of finance that he appointed in 1996, Trevor Manuel, realized that the only way to get back on course was to actually cut back on government spending rather than increasing on populist needs. That restored a lot of confidence in the South African economy but it took a long while. But it was only after the 2001 crisis that South Africa’s economy started picking up, but we did see credit ratings gradually improving and Standard &amp; Poor’s actually put us on investment credit rating for the first time,” says Jammine.
It is said that one of the reasons the Gordhan was fired was that he defied Zuma’s wish to commission Russia to build a $70-billion nuclear plant in South Africa.
“That is also why people are concerned the President appointed Gigaba instead of Pravin – in order to sign a nuclear deal. The fear with the nuclear deal is that it will cost R1 trillion, that it will be unaffordable. Our total public debt is R2 trillion and it will increase our debt in one fell swoop 40% to 50%, something that will stifle the ability to spend on everything else. What is particularly worrisome to people is why there is this dramatic desire to embark upon a nuclear deal? There are strong suspicions, as has been the case with other smaller projects that the president is personally involved with, that the Russians are paying him to get this deal through,” says Jammine.
This time, the president may have overplayed his hand. South Africans of all colors and creeds united to defy him.
President Zuma Bites Back
<div id="attachment_5617" style="width: 610px" class="wp-caption alignnone"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-5617" class="wp-image-5617 size-medium" src="/wp-content/uploads/2017/05/GettyImages-667743392-300x200.jpg" alt="" width="600" height="400" />Presidents Jacob Zuma&#8217;s Birthday Celebration</div>
While tens of thousands protested outside at the gates of the Union Buildings in frustrationon april 12, President Jacob Zuma ate cake – after all, it was his 75th birthday.
Eighty kilometers away from the crowds chanting down his name, Zuma celebrated in Kliptown, Soweto – the place where the Congress of the People drew up the guiding Freedom Charter in 1955 – with dancing, singing and speeches.
&#8220;Do not be fazed by people who are saying we are marching, we are marching, today was declared a national day of action. What is it? Zuma must go. What has he done? He is not running the country properly, he must go. You can&#8217;t even pick up the essence for the protest, it&#8217;s complicated to be the opposition. I am trying to put you at ease because if they don&#8217;t protest they wouldn&#8217;t be the opposition,&#8221; says Zuma in Zulu, his mother tongue.
&#8220;Don&#8217;t let the opposition make decisions on your behalf; you would have lost your way, because regardless of who the next leader is they will never be satisfied.&#8221;
Sitting next to him in a lavish armchair were some of his closest allies – Deputy Secretary General of the ANC Jessie Duarte, Water and Sanitation Minister Nomvula Mokonyane and Social Development Minister Bathabile Dlamini.
Zuma seemed unconcerned that key figures of the ANC were absent, among them the likes of  Deputy President Cyril Ramaphosa, Secretary General  Gwede Mantashe, and Treasurer General Zweli Mkhize.
The president chose to send a clear message to those who have been calling for him to step down. He said he would be willing to do so if called upon by the ANC.
&#8220;Even if you said tomorrow I should step down from my duties, I will gladly do that with a pure heart, but what I want to tell you my leaders is that I will be ANC until the day I die.&#8221;
It is not the only event in which Zuma has shrugged off opposition. Two days before, at the Chris Hani wreath laying ceremony in Thomas Nkobi Memorial Park, east of Johannesburg, he criticized the 60,000-strong national march on April 7.
&#8220;There is a resurgence of racism in our country… Many placards and posters displayed beliefs that we thought had been buried in 1994, with some posters depicting black people as baboons. It is clear that some of our white compatriots regard black people as being lesser human beings or sub-human,&#8221; he said.

One Decision, Many Repercussions, Millions Angry

What happens when the world’s mighty ratings agencies downgrade your country to a non-investment grade, the dreaded so-called junk status?
High interest rates, slow growth, capital flight and inflation are some of the problems that come with a downgrade; in short, everyone from a street vendor to a corporate executive will feel the pinch.
So how does a downgrade happen?
“Ratings agencies analyse a sovereign’s performance over past economic and political cycles, as well as factors that indicate greater or lesser economic flexibility in future economic cycles, to determine the country’s creditworthiness,” says Gardner Rusike, Sovereign Credit Analyst at Standard &amp; Poor’s, one of the three big agencies.
“Sovereign ratings can improve when a ratings agency takes a forward looking opinion that an individual country has a willingness and ability to service its debt on time and in full.”
Ratings agencies, Standard &amp; Poor’s (S&amp;P) and Fitch have South Africa at BBB–, a notch above sub-investment grade, while Moody’s has the country two notches above.
Most economists say, for South Africa, junk status is a when and not an if. But for now finance minister, Pravin Gordhan, says the country is breathing thanks to Moody’s and its two notches.
“We live in a very volatile world and for us this is coupled by our own structural concerns. We should make the right noises, building consensus and confidence to attract investment from both South Africans and international investors,” he says.
Moody’s issuing South Africa’s Baa2 long-term government bond, in May, says the first driver for the confirmation was the agency’s expectation that South Africa’s economic growth will gradually strengthen after a trough this year, as the various supply-side shocks, that have suppressed economic activity since 2014, recede.
The other two agencies, Fitch and S&amp;P are expected to report on their ratings in June.
Professor Jannie Rossouw, Head of the School of Economic and Business Sciences at the University of the Witwatersrand, says junk status for South Africa was not necessarily inevitable.
“Politicians have a tendency to make reckless statements in an election year. As for South Africa, it matters what will happen in the forthcoming municipal elections and how the Independent Electoral Commission will conduct the August 3 municipal polls. We also need the right policies, such as on immigration, media freedoms, as investors require information to make investment decisions,” says Rossouw.
Hanns Spangenberg, Senior Economist at NKC African Economics, says while a drop to junk status could have significant implications for the South African debt market, much of the damage has already been done.
“In fact, according to our model, South African bonds (rated BBB-) are currently priced between a BB+ and a BB-rated bond (i.e. one to two notches lower than its actual rating). This indicates that a downgrade to junk status has already been priced in,” he says.
He says it may not be that bad.
“While a downgrade will probably have some effects, we do not anticipate massive capital outflows from South Africa if the country’s rating is downgraded to junk status, not as a direct result of the downgrade, and not significantly more than the emerging market sphere is already facing this year.”
Rossouw says South Africa needs decisive government action.
“There has been some actions from the government that could trigger ratings downgrade, this include the cabinet reshuffle of 9 December, 2015 (when the country had three finance ministers in four days). We can’t afford such irresponsible actions. Government should stick to its budget and should not borrow more than what is budgeted for.”
South Africa’s Deputy President, Cyril Ramaphosa, warns of hard times if there is a downgrade.
“South Africans have taken the bull by the horns and they are doing as much as possible to try to move the needle in the right direction. We should not be downgraded. We are very positive and robust, clearly we are doing as much as we can,” Ramaphosa told Eyewitness News.
If downgraded, South Africa will join Russia, Brazil, Bulgaria, Greece, Indonesia, and Turkey. It will mean these countries – facing economic headwinds and struggling to lure investment – will have a new competitor from the southernmost tip of Africa.

Tag: Junk Status

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Zambia’s Credit Rating Downgraded to Near Junk Status

Moody’s Downgrades South Africa To Junk

One Decision, Many Repercussions, Millions Angry

The Junk Dunk