Standard Bank Research Team
Standard Bank
S&P downgraded Eskom’s global scale rating to sub-investment grade late yesterday afternoon.
Eskom is now rated sub-investment grade by both Moody’s and S&P. All else equal, a lower credit rating should raise financing cost for any company.
The rating agency cited the board’s suspension of the CEO and three executives as leading “us to have less confidence in the company’s corporate governance arrangements as well as in its stand-alone credit profile (SACP)”.
An upgrade to the rating is “unlikely in the foreseeable future given the current pressures on the SACP”
Local government bonds could come under pressure today, following Eskom’s downgrade by S&P, while the news is also rand negative.
The better-than-expect current account data and the dovish US Fed helped the rand stabilise. Eskom’s downgrade may remove some of this more positive sentiment for towards the currency.
The rand needs to close below 12.00 before further strength may be forthcoming. Until this happen dips towards 12.00 in the rand is likely to be sold into.
Next week the SARB’s MPC meeting is on the menu. We expect hawkish MPC statement and press conference. That said, we expect the repo rate to remain unchanged.
A hawkish MPC may add some strength to the rand from an interest rate differential perspective.
International developments
As anticipated the Swiss National Bank (SNB) left rates unchanged yesterday. Steve Barrow (G10 strategist) believes that the SNB probably needs to save up another rate cut until the franc comes under upward pressure again. But, with growth and inflation forecasts slashed there's clearly still pressure for easier policy even without upward pressure on the franc. The odds probably favour another reduction in rates in the future, especially if growth does not recover later in the year from the slump that's likely in Q1:15 and/or Q2:15 as a result of the SNB’s decision to end the 1.20 euro/Swiss floor.
The EU leaders’ summit continues today and presumably most of the markets interest will lie in the relations between Greece and the rest of the attendees. There appeared to be considerable angst amongst finance ministers earlier in the week over Greece’s failure to lay out reform plans and reform progress in the detail required. Today we might see whether Greek PM Tsipras has been able to allay these concerns at the leaders’ level. It certainly seemed to be the case earlier in the week that Greek officials wanted the discussions to be at this higher level and not at the finance minister level. But this puts the emphasis on Tsipras to deliver. If he falls short and the rhetoric between Greece and the rest of the EU sours again, the euro could suffer.
Now that the budget is out of the way the market might have less interest in today’s deficit figures in the UK. For what it is worth, the deficit is seen at GBP8.5bn once you exclude bank support. We think the deficit might be a little larger. It should not have any bearing on the market since gilts already seem to have been emboldened by the fact that the Chancellor eschewed a ‘giveaway’ budget in favour of one that paid down debt a bit faster. Steve was not surprised by this given that economic/financial management is the trump card the Conservatives seem to hold over Labour when it comes to the polls. Hence Osborne et al all clearly decided that it was better to play this card than offer fiscal hand-outs that might put the credibility of the deficit reduction program in doubt. Of course, there will be another budget after the election and if the opposition Labour Party lead the new government the gilt market – and perhaps also sterling – could fret anew.
Local developments
Late in the evening, Standard & Poor’s downgraded Eskom’s global scale rating to BB+, from BBB-, keeping the negative outlook. We view this development as rand and bond negative.
The SOE’s national scale rating has been downgraded to zaA/zaA-2 from zaAA-/zaA-1. The rating agency cited the board’s suspension of the CEO and three executives as leading “us to have less confidence in the company’s corporate governance arrangements as well as in its stand-alone credit profile (SACP)”. This is reflected in Eskom’s management and governance level as being moved lower to “weak”, from “fair” and the standalone rating being lowered to ccc+, from b-. The rating agency continues to give Eskom a six notch uplift from its standalone rating, due to the “extremely high likelihood” of “extraordinary state support”.
The agency further states that “the negative outlook reflects our opinion that material execution risk remains associated with the government’s support plan, and that Eskom’s operating performance has not yet stabilized”. S&P now also explicitly notes that in order for the SOE to be placed on a stable outlook, Eskom’s management needs to demonstrate “a restored relationship with key stakeholders, such as the ESKOM board and the South African government”.
An upgrade to the rating is “unlikely in the foreseeable future given the current pressures on the SACP”. Eskom is now rated sub-investment grade by Moody’s (Ba1, stable outlook) and S&P.
Markets
The rand weakened on Thursday, reversing Wednesday’s gains. The local currency closed at 12.31, compared to Wednesday’s close of 12.06. The rand’s depreciation against the greenback occurred in line dollar strength against all of the major currencies; the dollar posted the largest gains against the euro (-1.9%), the pound (-1.5%) and the yen (0.6%). The rand lost ground against all of the major crosses; the yen (-1.5%), the pound (0.5%) and the euro (0.2%). The rand put in the worst performance amongst the commodity currencies we monitor for purposes of this report and put in the second-worst performance amongst the EM currencies on the day, only ahead of the BRL. The rand traded between a low of USDZAR12.0379 and a high of USDZAR12.3532 intraday.
At yesterday’s switch auction, NT switched R3.935bn of R203, R2.480bn of R204 and R4.920bn of R207, for a total of R13.805bn of short-dated debt. The R203 was switched into the R186 (R838m), R2030 (R2.198bn) and R2037 (R825m). The R204 was switched into the R186 (R2.111bn), R2030 (R1.001bn) and R2037 (R797m). The R207 was switched into the R186 (R613m) and R2037 (R4.889bn), with nothing switched into the R2030. Over the course of the three switch auctions this year, NT has now switched a total of R19.815bn of R203, R13.315bn of R204, R5.665bn of R207 and RR8.410bn of R208.
Metal prices were up on Thursday. Copper was up by 3.2% while platinum and gold were up by 0.6% and 0.3% respectively. The price of Brent decreased on Thursday, by 2.7% to close lower at $54.43/bbl. The developed world MSCI was down by 0.2% while the MSCI EM was up by 0.9% on the day. The ALSI was up by 1.1% on the day. The EMBI spread narrowed by 16 bps and SA’s 5yr CDS narrowed by 1 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 0.7%.
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