South Africa Sovereign Credit Rating “Junk status” … Authorised Financial Services Provider Strictly Private and Confidential South Africa Sovereign Credit Rating “Junk status”

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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


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


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


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


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


% USD/ZAR ALSI

-30

-20

-10

0

10

20


% R186 10-y 2-y 1y1y 5y5y 5-y CDS R210

-2.0

-1.0

0.0

1.0

2.0

3.0


% USD/ZAR ALSI


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


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


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


Structural features

Economic performance

External finances

Public finance


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


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


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


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


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


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


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


7.2 0.9

1.7 0.6

-1.2

-15-10

-505

1015202530


%

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


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


Brazil Russia Bulgaria

Hungary Post-crisis ave SA


60

054

-59-28

-150

-100

-50

0

50

100

150

200


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


Brazil Russia CroatiaBulgaria Hungary Post-crisis aveSA

*Brazil, Turkey, Russia, Colombia, Mexico, Bulgaria, Hungary, Philippines, Poland, India, Indonesia


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


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


%

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


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


Brazil Russia BulgariaHungary Colombia SAPost-crisis ave


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


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


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June 2014

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South Africa Sovereign Credit Rating “Junk status” … Authorised Financial Services Provider Strictly Private and Confidential South Africa Sovereign Credit Rating “Junk status”