South Africa more risky than Turkey as Fitch downgrade looms

Investors see more risk in South Africa than in lower-rated Turkey as the creditworthiness of Africa’s second-largest economy looks set to step closer to junk.

The cost of insuring against a default by South Africa’s government for five years using credit-default swaps surpassed that of Turkey on Oct. 23, two days after the government widened its budget-deficit targets and the day riot police battled protesting students on the lawns outside President Jacob Zuma’s office in the capital, Pretoria. The South African contracts are priced 13 basis points higher than those of Turkey, which is embroiled in the Syrian conflict and threatened with sanctions by Russia.

Twelve of 13 analysts surveyed by Bloomberg see Fitch Ratings Ltd. downgrading South Africa to BBB-, one level above junk, later on Friday. Turkey is rated sub-investment by Standard & Poor’s and the lowest investment grade by Fitch.

“Turkey’s election in November had quite a good outcome, while South Africa’s medium-term budget policy statement was actually quite negative,” Ilke van Zyl, an economist at FirstRand Ltd.’s Johannesburg-based investment-banking unit, said by phone on Thursday. “A lot of the downgrade risk is already priced in and that could explain quite a lot of the so- called decoupling of the CDS’s.”

While Standard & Poor’s should keep its rating for South Africa at BBB- on Friday, some analysts are predicting the company will lower its outlook to negative, according to those surveyed by Bloomberg.

Africa’s most-industrialized economy narrowly avoided a recession in the third quarter, posting 0.7 percent annualized growth after a contraction in the previous three months as electricity shortages, low global demand and falling metal prices stifled output. The central bank forecasts gross domestic product to expand 1.4 percent this year. That would be the slowest pace since a recession in 2009.

“There’s been some issues about the fiscal policies, there’s been some pressure from commodity prices and there has been bad economic figures, like the PMI that decreased, slow GDP figures and slow industrial figures,” Peter Skoettegaard Oeemig, a senior portfolio manager for emerging markets at Jyske Bank A/S in Silkeborg, Denmark, said by phone. “That’s part of the reason why South Africa is starting to look a bit like something which can develop to be a new Brazilian case, where the government was not able to do the right reforms.”

South Africa’s currency weakened to a record 14.4930 against the dollar this week after the trade gap swelled and the Reserve Bank warned the rand may weaken further after the U.S. Federal Reserve raises interest rates for the first time in almost a decade. The rand has lost 19 percent of its value against the dollar this year, the most after Brazil among 16 major currencies tracked by Bloomberg.

~Bloomberg