“There is something called the Queensbury Rule. You do not continue to beat up somebody who is on their knees. You do not. It is the rule. Civilized people abide by that Rule in business, sports, and politics. Rating Agencies should treat us the same way. During a global crisis!”



This was the response on Twitter of South Africa’s Finance Minister, Tito Mboweni on Sunday, November 21, after three dominant international credit rating agencies announced that the “outlook is negative” for the country.



American credit agencies, Fitch Ratings, announced on November 20 that South Africa&#8217;s Long-Term Foreign-Currency Issuer Default Rating (IDR) had downgraded to &#8216;BB-&#8216; from &#8216;BB&#8217;. Joining Fitch, Moody&#8217;s Investors Service (Moody’s) also announced on Friday that the country’s ratings had been downgraded from Ba1 to Ba2. This is in addition to S&amp;P Global Ratings status on the country in April 2020 when they downgraded the country’s credit ratings to BB- from BB.



What could this mean for South Africa in a year of the pandemic?



Professor Philippe Burger, Pro-Vice-Chancellor of Poverty, Inequality, and Economic Development at the University of the Free State in South Africa, says that the downgrade means that medium- to long-run interests will now be higher as opposed to what it would have been in the absence of a downgrade.



“That will affect everyone who needs to borrow, be it households or the government. It also means that to attract foreign investment into the country, we will have to offer more attractive returns on investment,” Burger adds.



The African Peer Review Mechanism (APRM), a specialized entity of the African Union (AU), noted that because this has happened twice now since the start of the pandemic, the “expectation that fiscal deficit will widen and government debt will rise.” Like many other countries, the Covid-19 pandemic has had a severe impact on South Africa’s economy. However, Fitch said that investment spending had already weakened in recent years in the country, falling last year to the lowest level in real terms since 2012. This reflects on challenges to the business environment such as the poor reliability of power supply, labor market inflexibility, and subdued domestic demand prospects. Although Moody’s said that the country had maintained a negative outlook in place since the beginning of November 2019, the South African National Treasury stated the Covid-19 pandemic hit South Africa at a difficult time. “Recent downgrades saw South Africa reaching its lowest credit rating levels from the ‘big three’ rating agencies since 1994. Economic growth has continued to decline irrespective of the attempts to reduce structural constraints,” the statement read on Saturday. Fitch further said that though President Cyril Ramaphosa announced an Economic Reconstruction and Recovery Plan in October, which focuses on boosting infrastructure investment, increasing energy supply, job creation, and re-industrialization, the country’s “track record” leaves nothing to be desired. “The track record of implementation of earlier reform initiatives has been relatively weak and, even if implemented, the effect of the reforms would be limited and take time to accumulate,” Fitch’s statement read. Unemployment in South Africa continues to be one of the country’s biggest challenges as it sits at 30.8%, according to Statistics South Africa (Stats SA).



“While South Africa is not alone in having been severely affected by the crisis, its capacity to mitigate the shock over the medium term is lower than that of many sovereigns given significant fiscal, economic and social constraints and rising borrowing costs,” Moody’s stated in their release. South Africa’s Minister of Finance, Tito Mboweni, stated that the downgrade “is a painful one” and the implications of this will now affect the country’s borrowing costs. The National Treasury added that as outlined by the president’s recovery plan, the government’s plan to prioritize economic recovery and fiscal consolidation remains the same. “The downgrade will not only have immediate implications for our borrowing costs, but it will also 6 constrain our fiscal framework,” Mboweni said in a statement. “There is, therefore, an urgent need for government and its social partners to work together to ensure that we keep the sanctity of the fiscal framework and implement much-needed structural economic reforms to avoid further harm to our sovereign rating.” Professor Burger believes that from an expert’s perspective, the government would need to take the following steps to alleviate the problem: “Re-establish fiscal sustainability and take steps to arrest the upward trend in the public debt-to-GDP ratio and ensure it does not breach 100%. This will require enforcing the medium-term budget policy statement (MTBPS) plans on the salary freeze on civil service salaries for this year and the next three years; Take necessary steps such a reducing red tape and policy uncertainty; Take steps needed to release spectrum and restructure and liberalize the energy sector. The latter includes getting the green energy sectors going. Many of these plans are in the pipeline but need acceleration.”



Treasury stated however that the rating agencies have indicated that the country’s rating strengths include “a credible central bank, a flexible exchange rate, an actively traded currency, and deep capital markets, which should help counterbalance low economic growth and fiscal pressures.”

Economy Concept

What South Africa’s Recent Credit Rating Downgrade Actually Means

American credit rating agency, Fitch, announced on September 24 that it has downgraded Zambia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from &#8216;CC&#8217; to ‘C’. The country’s senior unsecured foreign currency bonds were also downgraded this week.



This follows the Zambian government issuing a &#8220;consent solicitation&#8221; to holders of three global bonds (Eurobonds) on September 22, requesting a suspension of debt service payments for six months. This would effectively be covering the upcoming three coupon payments due on October 14, and January and March 2021.



Zambia’s Ministry of Finance stated that the country has been confronted with challenging macroeconomic and fiscal situations aggravated by the Covid-19 crisis. This has severely impacted the country’s public finances.



“A combination of declining revenues and increased unbudgeted costs caused by the Covid-19 pandemic has resulted in a material impact on the Government’s available resources to make timely payments on its indebtedness leading to increasing debt-servicing difficulties,” Fredson Yamba, Secretary to Treasury, said in a statement on Tuesday.



In its report, Fitch stated that should bondholders agree to the suspension in payment, this would constitute a distressed debt exchange (DDE).



“The authorities have indicated that they will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached. However, Fitch judges that there is a high risk of a missed debt payment over the forecast horizon,” Fitch said in its press release.



The Zambian government further said in a statement that they are still engaging with the International Monetary Fund (IMF) to secure financial assistance. The government hopes to create a program of reforms that would help in stabilizing the macroeconomic outlook of the country and restore its fiscal balance.



“In this context, the government is committed to finding a consensual and collaborative resolution to the debt sustainability issues it is currently facing,” Yamba said.



The ‘CC’ rating, which occurred on April 16, due to the sovereign’s constrained external liquidity exacerbated by the pandemic, meant that the country was left in a highly vulnerable position, financially. How will this newly downgraded rating bode for Zambia now?



“The downgrade of Zambia&#8217;s rating reflects Fitch&#8217;s view that a default event is imminent.”

Graph Falling Down in Front Of Zambia Flag. Crisis Concept

Zambia’s Credit Rating Downgraded to Near Junk Status

Robert and Greg Lewis are doing something right in one of the world’s toughest business environments.
“In 2009 we looked at our business and realized we were on to something amazing,” says Robert Lewis in the lounge of Luanda International Airport.
He will travel back to home base London after just one day in Luanda and barely has time to squeeze in an interview. Despite his extreme schedule, Lewis looks fresh and well-rested. He talks fast, bubbling with energy.
“As the world’s economy collapsed, everyone became a lot tighter on their controls. Insurance was the first step. Once we had our A- level rating, we got a stamp of approval from anyone looking for insurance in Angola or Mozambique.”
In 2005, GA Angola Seguros was awarded the first private insurance license since Angolan independence in 1975. That year, it made a turnover of $415,334. Its credit rating was upgraded from BBB+ in 2006 and A- in 2008 to its current A level status in 2011, in one of the world’s toughest business environments. The company’s turnover in 2011 had increased to a staggering $130 million. This year’s expected turnover is $150 million.
With 140 employees and offices in Luanda, Lobito, Lubango and Santa Clara as well as in London and Johannesburg, GA attracts big international clients. Brazilian construction company, Odebrecht, is its largest. Others include Coca-Cola, Haliburton, Baker Hughes, Technip, Panalpina, Mota-Engil and Soares da Costa.
The success story began in 1988, after Rob Lewis finished school in Johannesburg and had to join the army.
“When Mandela was released and apartheid fell apart, the government cancelled the army midway through. I was 19 at the time.”
It was June and university courses only started in January. Meanwhile, he was given a job as a runner on the stock exchange, at Irish and Company Stockbrokers. He loved it.
In 1994, Lewis became one of the youngest members of the Johannesburg Stock Exchange and consequently partner of Irish &amp; Menell Rosenberg as the head of a sales trading desk. He reached such incredible heights, four years after his start as a runner.
In 1998, Lewis sold his shares in Irish &amp; Menell Rosenberg and, as the IT bubble was forming, started South Africa’s first online stock broker: U-Trade. He and his partners invested R5,000,000 ($580,000).
“In those days, everyone was talking about IT, like everyone now is talking about Africa. We had a rush of investors that pushed us into an IPO.”
After six months, the interest “plateaued”.
“South Africa is a very small market. We had basically captured all the business there was.”
Lewis sold his 49% share in U-Trade around two weeks before the Nasdaq fell apart and the IT bubble burst. U-Turn merged with the Appleton Group in 2001, forming South Africa’s largest private client Stock Broker.
Part of the deal was that Lewis could not go back to stock broking; the new U-Trade owners did not want him as a competitor. Instead his brother, Greg, who had established a reinsurance broker in South Africa in 1996, introduced him to his next big catch, a Mozambican insurance company called CGSM SA.
After they purchased the company, Robert and Greg discovered that the management had run the company into the ground. It had no cash left and needed more capital.
“We learned very good, and luckily cheap, lessons in Mozambique: we had to control, understand and micro-manage the business before we could expand. We learnt—and I believe this goes for entire Africa—that unless you do it yourself, you’re going to lose money. What it comes down to, is doing ordinary things extraordinarily well,” says Lewis.
“The world is Angola mad right now. Many people are currently losing money in Africa. They are looking at blue skies, thinking there’s all this wealth going to come out of it. There will be many casualties, as in IT. Even though the greater picture will be brilliant,” says Lewis.
The lesson was immediately put into practice.
“When my brother and I bought CGSM, the turnover was $2 million. We simplified the policies, published them in English and in Portuguese and significantly improved service and security. As a result, the market exploded. By March 2002 our turnover was $8 million, four times higher than the year before.”
Global Alliance Holdings and Gerhard Du Toit, the programmer who built U-Trade’s online stockbroking system, went into a joint venture in 2001. They started Kindle Insurance Technology (KIT) a provider of software solutions.
“The IT platform has been a huge contributor to GA’s strength,” says Lewis.
KIT sells software to the biggest insurance company and others in South Africa, Europe and other countries. Global Alliance Holdings still owns 50% of Kindle.
In 2003, Global Alliance Mozambique was running out of growth opportunities and many of its clients were pushing to open in Angola. After their first visit and with the encouragement of the Angolan insurance regulator, Lewis decided that Angola was where the company’s growth was going to come from. GA Angola Seguros was the first foreign insurance company to set foot in Angola in 30 years.
The license took almost three years to obtain.
“A large portion of that time was taken up finding the right partner, as at least 30 percent of shares in Angolan insurance companies have to be held by Angolan nationals. We wanted partners who could add intellectual capital rather than political connections, and found the perfect fit. They allowed us to run the insurance business while they advised us on Angolan culture, laws, buying habits and the economic climate.”
The company obtained its license at the end of 2005 with an initial capital of $6 million.
In 2008, the world economy started playing into GA Angola’s hands.
“Once the European and US markets started turning down after 2008, we suddenly had a big influx of qualified Angolans returning from the UK and US. We were incredibly lucky to employ some very qualified insurance managers. They have formed the backbone of the company.”
At this time, Lewis made his second educational mistake.
“In those early days in Angola, we had the mad, grand vision that we were going to be all over Africa. It was almost as if we were feeding our ego. We opened up in Ghana, tried to buy an insurance company in Namibia, started opening an office in Sâo Tomé and looked at DRC.”
“Then Ghana caught us off guard. On the surface it looked brilliant. But there was little transparency with the regulator, and the market was rife with nepotism and favoritism. We made a huge mistake getting into Ghana.”
The brothers realized that the money the company made in Angola and Mozambique was being poured into new African operations that would never yield profit.
“In 2006/ 2007, the world was on fire. We could not find the staff to run these companies and lost total control of our business.”
They sold their Ghana operation in 2009 to Cameroon-based Activa Group.
Lewis calls Ghana the exact opposite of Angola.
“Ghana was easy to get into, but once we were in, the hurdles were raised. Angola, jealously guards entry to the market but once a commitment is shown the doors all open.”
GA Angola’s success came just in time. Eleven insurance companies currently operate in Angola, at least seven of them are Angolan and four Portuguese. Angolan State insurance companies AAA and ENSA, which control more than 60% of the market, are by far the largest. The Angolan insurance pie according to Lewis is worth around $1 billion.
“The market can’t afford more insurers at this point. AAA has probably got at least 50 to 60 percent, ENSA does about $250 million turnover and GA has circa $150 million, which leaves $150 million split among 9 insurers. That’s very, very tight.”
Insurance companies make money out of investments and in Angola, investment opportunities are limited.
“You’ve got banks, treasury bills and property. Banks are the only liquid investment you can make. There is no stock exchange, so it’s very difficult for insurance companies to make money away from insurance underwriting. There is only so much money that can be made.”
Through GA, Lewis has an impressive insight into trends in Angolan society.
“During the 2008 elections there was high demand for political instability and terrorism policies. For the 2012 elections, we literally didn’t sell a single policy. Despite what was printed in some media circles there was no concern from people on the ground.”
GA’s best-selling products among big multinationals are motor and liability insurances. Industrial assets insurance is their second-best selling product.
“Strange as it may sound, we are losing money in this class of insurance as a result of Angola’s overall progress towards a peace time economy. During the civil war [1975-2002] no one dared to commit a crime because everyone was so heavily armed. The country is slowly becoming more democratic with international NGOs watching over the government, stopping its clampdown on crime. Although this is good news for Angola as a whole, this has allowed crime and claims to escalate.”
“Another reason why we’re losing money on our assets insurances is the deterioration of internal risk management by multinational companies. During the war years their risk management was fantastic, which made it a very profitable business for us. In recent years, they have relaxed their focus on contingency planning and self sufficiency.”
Lewis and his brother have sold their shares in Global Alliance CGSM Seguros to Barclays. French insurance group Colina will buy the brothers’ shares in GA Angola Seguros, but Robert and Greg Lewis will retain a working interest in the company.
The next phase is already in motion; the Lewises are forming an Africa-focused re-insurer.
“It will be the very first re-insurer of its kind. We plan to knock the competition off its complacent perch.”

Tag: Credit Rating

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