The decision by Moody’s on Friday (27 March 2020) to downgrade South Africa’s long term foreign and local currency debt ratings to ‘Ba1’ from ‘Baa3’ and maintain its negative outlook, was unfortunate though not unexpected.
This is according to a statement from the Johannesburg Stock Exchange (JSE), which points out that South Africa’s debt rating is now rated below investment grade by all three major ratings agencies: Standard & Poor’s, Fitch and Moody’s.
The biggest impact of the downgrade, says JSE Group CEO Leila Fourie, would be in the bond market as South African government bonds will fall out of the FTSE World Government Bond Index (WGBI), sparking an outflow of investment grade capital in the run up to and including the April rebalancing.
Foreign investors own 37%, or about R780-billion, of South Africa’s local-currency bonds, according to National Treasury data.
“While index exclusion is likely to force outflows from passive funds in the coming weeks, some active managers could pick up the slack, limiting some of the net market fall out,” Fourie says. “The world capital markets are efficient, and they have already priced in the sub-investment grade risk that South Africa reflects, which is a slight relief. In fact, I believe we could see a partial bounce back after an initial negative reaction settle.”
She cautions that markets would in the interim period more likely be punctuated by Covid-19 news flow: “Markets and people are not reacting the way they might have in the past because of the sense of panic and uncertainty.
“During a time of crisis, the information value from ratings agencies can be drowned out by other factors influencing market movements. In fact, right now Covid-19 and the epidemiological forecasts outweigh Moody’s agency downgrade as they are better predictors of government action and economic growth.”
Moody’s noted South Africa’s continued deterioration in fiscal strength and structurally weak economic growth supported its decision to downgrade. The agency expects government’s gross debt ratios to climb to 91% of GDP and the government deficit to widen to 8.5% of GDP in the near term.
Moody’s announcement came at the end of the first day of South Africa’s 21-day lockdown period as part of the government’s bid to break the chain of transmission of the Covid-19 virus.
“Junk status will have major implications for us as a country and could fast-track structural reform in the country, accompanied by tectonic political and economic shifts,” says Fourie.
“There’s no doubt that navigating through this will require incredible courage and resolution, but South Africa is renowned for just that; achieving it in 1994 and again in 2018.”
With regard to the impact on the real economy, she says: “There is no doubt that the downgrade will impact the cost of capital of our banks too, who won’t be able to pierce the sovereign ceiling so the cost of borrowing for South Africans is going to increase.
“In President Cyril Ramaphosa, the country has a leader whose management of the current global health crisis, should fill everyone with immense confidence,” Fourie concludes.