09 May 2017

Risk update: probability of extreme down case rises to 19%, up case drops to 10% on downgrades, baseline case weaker growth and rand

Annabel Bishop

Chief Economic

With this document being an economic risk and credit rating update document, the migration path of the scenarios and hence probabilities, qualitative and quantitative information is explained.

Risk Update

In particular, a migration occurred within a quarter, Q2.17, as S&P and Fitch delivered downgrades on 3rd and 7th April respectively (see figure 11), after the Q2.17 scenarios (pre-downgrade) were already active.

The Q2.17 post-downgrade scenarios, i.e. the ones that subsequently went live are given in the migration tables for comparison (see figures 1,3,5,7 and 9). Specifically, the Q2.17 post-downgrade scenarios characterize South Africa’s baseline partial sub-investment grade status following the downgrade of its local and hard currency long-term sovereign debt credit ratings. This has necessitated changes to the qualitative (written characterization) and quantitative (numerical characterisation) of the baseline, down and extreme down scenarios. The extended currency forecasts are also given for all scenarios (see figures 2,4,6,8 and 10).

Scenario 3 or the baseline scenario (off which the others are calculated) for Q2.17 now shows a depreciated rand and higher long-term interest rates than in Q2.17 pre-downgrade (and a slightly higher inflation longer-term). While April’s drop in SA’s sovereign long-term credit ratings saw the rand weaken to R13.96/USD, R14.87/EUR and R17.34/GBP the rand’s post-downgrade strength reflected the continuation of the global risk-on appetite, particularly to EM local currency (LC) debt, with SA still attractive in this respect as the country retains two investment grade (IG) ratings on its LC denominated long-term sovereign debt. Expanded forecasts show GDP growth somewhat weaker, unemployment lifts over the period (although Q2.17 pre-downgrade also saw this due to the very weak growth rate). Property prices are slightly subdued as the long-bond has risen. The rand takes longer to strengthen back toward PPP. While the up and extreme up qualitative and quantitative are unchanged (besides historical updates) the likelihood of the up case has dropped from 15% to 10% to reflect the worsening outlook, increased tilt to the downside, as a consequence of the downgrades (the extreme up case remains unattainable at 1% under current circumstances).

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