Moody’s leaves South Africa teetering on brink of ‘junk’

South African President Cyril Ramaphosa has struggled to revive Africa’s most advanced economy since taking over from scandal-plagued Jacob Zuma in February 2018. (AFP)
Updated 03 November 2019

Moody’s leaves South Africa teetering on brink of ‘junk’

  • Moody’s said the outlook revision on its ‘Baa3’ rating, the lowest rung of investment grade, was motivated by a deterioration in the economic growth outlook and rising debt

JOHANNESBURG/LONDON: Moody’s left South Africa on the brink of “junk” status on Friday after it revised the outlook on the country’s last investment-grade credit rating to “negative,” piling pressure on President Cyril Ramaphosa to quicken the pace of reform.
Moody’s said the outlook revision on its ‘Baa3’ rating, the lowest rung of investment grade, was motivated by a deterioration in the economic growth outlook and rising debt.
Analysts had expected the move after a bleak mid-term budget statement this week that slashed this year’s growth forecast to 0.5 percent and showed government debt racing to more than 70 percent of gross domestic product by 2023.
The rand tumbled more than 2.5 percent over the past week against the dollar, its sharpest weekly drop since early August. Yields on local 10-year government bond issues traded on Monday at just over 8 percent but climbed as high as 8.6 percent following the dire budget predictions.
The negative outlook means there is a window of 12-18 months in which a downgrade could be delivered, but it could come sooner if Moody’s isn’t impressed by the fiscal picture presented at the next budget statement in February.
“The development of a credible fiscal strategy to contain the rise in debt, including in the 2020 budget process and statement, will be crucial to sustain the rating at its current level,” Moody’s said in a statement after South African financial markets had closed.
It added that its new outlook reflected rising concern that the government would not find “the political capital to implement the range of measures it intends, and that its plans will be largely ineffective in lifting growth.”
The finance ministry responded by saying the country had “a narrow window to demonstrate faster and concrete implementation of reforms.”
Ramaphosa has struggled to revive Africa’s most advanced economy since taking over from scandal-plagued Jacob Zuma in February 2018.
The wave of optimism among foreign and local investors that accompanied his rise to power has fizzled out as the economic challenges have grown more acute, with unemployment reaching an 11-year high above 29 percent and state power company Eskom struggling to keep the lights on.
One of the greatest worries is rising government debt, which shows no signs of stabilizing soon amid repeated bailouts for state-owned companies.
Fund managers said they were not expecting a steep sell-off in government bonds and the rand when financial markets re-open on Monday, because the outlook revision was expected by so many and South African assets had fallen sharply over the past week.
The spread of South African dollar debt over US Treasuries is already wider than on some junk-rated sovereigns, reflecting longstanding concerns over the country’s fiscal health.
“Valuations are already reflecting this outcome. So, on any sell-offs, we would see it as a buying opportunity,” said Jean-Charles Sambor, deputy head of emerging market fixed income at BNP Paribas Asset Management.
S&P Global and Fitch already moved South Africa’s debt to sub-investment level in 2017, when the country was embroiled in corruption scandals under Zuma.
A move to “junk status” from all three agencies typically increases a government’s cost of borrowing by raising the premium that investors demand to hold its debt. It could also see South Africa evicted from the benchmark World Government Bond Index of local-currency debt, which could trigger billions of dollars of passive outflows.
Phoenix Kalen, director of emerging markets strategy at Societe Generale, said South Africa was now in the “last-chance saloon” and that it had to stabilize its debt.
“This will be a Herculean task,” Kalen said, citing financial pressures at state companies among causes for concern.
Ramaphosa’s government has promised Eskom 230 billion rand ($15.3 billion) of bailouts over the next decade, on top of a 59 billion rand “special appropriation” over the next two fiscal years. But analysts say it will need more state money than that.
Kevin Lings, chief economist at asset manager Stanlib, said a downgrade in 2020 was now his “base case” and that some investors would be reluctant to buy South African debt until the downgrade had happened.
“Next year is going to be marked by consistent uncertainty around the currency and bond markets, it’s going to put South Africa under a lot of strain,” he said.


Playtime for Saudi LEGO fans as new store opens in Jeddah

Updated 1 min 19 sec ago

Playtime for Saudi LEGO fans as new store opens in Jeddah

DUBAI: Following LEGO’s first Saudi store opening in Jeddah and the launch of its new Super Mario collection, we catch up with Urszula Bieganska, head of marketing, LEGO MEA.

Q: Tell us about the partnership with Nintendo and Super Mario.

A: It is a really exciting partnership for us; we have been working with Nintendo on launching Super Mario for quite a few years. The objective for both companies was to develop something of amazing quality, which is why we took our time working on the project.

Q: Where is it available and when is it launching?

A: It has already launched in Japan, and Aug. 1 was the global launch, although it has been available for pre-order prior to that date.

Q: Tell us about your new store in Jeddah.

A: We just opened the first Lego store at the Red Sea Mall in Jeddah and have launched the online store as well, which is going to carry all LEGO products available globally. For the first time ever, we actually have all the products available in Saudi Arabia.

Q: Why did you choose to open your first Saudi store at this time?

A: We were considering this for a long time, but we were also looking for the right partner to do it with. It’s a franchise model in partnership with the Kamal Osman Jamjoom Group. Once we established a relationship with this company, we were finally able to bring proper Lego stores to Saudi Arabia, which we’re incredibly excited about.

We opened the physical and online stores on the same day just to make sure that we catered to consumers’ different needs. Not everyone feels confident enough to go and shop in-store yet. Saudi Arabia is a huge country, and the physical store is only in Jeddah, so we wanted to invest in the e-commerce store to make sure we’re able to reach everyone.

Q: Do you have plans with any other Nintendo brands, such as Pokémon? 

A: That’s not something I’m able to talk about right now. We are focusing on Super Mario at the moment, but this is not just a one-year thing for us; it’s a long-term partnership with Nintendo. Also, it’s not limited to just one product. We have the starter set and a whole range of products through which fans can build their own Mario world. It also comes with an app that is free of charge and that you can download on your device to have an integrated experience. So, there are a lot of features that I think users will spend a long time exploring.

Q: What has the reception been like? There are a lot of adult fans too, for whom Super Mario could potentially have nostalgic value.

A: The interest has been quite overwhelming, and adults indeed make up a big part of the consumer base. There’s a lot of nostalgic sentiment.

Q: Can you describe your advertising and marketing strategy here in the Middle East and Africa region?

A: There’s so much excitement from fans surrounding this product, which has generated a lot of virality. This is positive especially right now when people are, to a large extent, operating in the home environment and are looking for different activities to stay occupied and entertained. So, through our campaign, we talked to both adult fans and parents because Super Mario is something that parents can relate to, and it’s exciting for kids as well.

Q: Did the pandemic and resulting lockdown affect your marketing activities?

A: We focused on the product reveal in different stages and started teasers as early as April-May 2020. We had to change our plans quite a bit! We had previously had a lot of event-focused advertising, and we wanted to have a big reveal where we would invite media and influencers in different global locations. But, due to the outbreak of the pandemic, we had to change our approach and strategy, which also put to the test the agility of our organization. We had to adopt a more virtual approach, so we sent over some sets for the biggest fans ahead of the launch. We also focused on social media advertising. But in the month of July, we actually pulled back a lot from investing in social media due to concerns regarding the safety of those platforms. We are posting organically, but we do not invest in promotion, and that will be the case for the foreseeable future until we conclude the conversations with these platforms.

Q: Did the pause in social media advertising negatively impact the campaign?

A: At the moment, no. To be honest, because we had already generated that interest and buzz, people kept coming back and checking in. Also, we benefited a lot from the fact that there is a great deal of excitement surrounding the two brands.