Markets & economy

Impact of Moody's downgrade

As a consequence of the decision by Moody’s to lower South Africa’s credit rating from Ba1 to Baa3, all three leading rating agencies now rate South African government debt at a sub investment grade, or what is popularly called ‘junk’. While there were hopes that this decision would be deferred, it was not unexpected. The market had already consigned South Africa to junk status long ago. Moody’s cited concerns about our economic growth rate and the rapid increase in government debt, which they expect to reach 91% of GDP by the end of 2023.

Moody’s decision means that South Africa now will be evicted from the FTSE World Government Bond Index (WGBI). Normally this would have happened at the end of March, but the WGBI management has decided to postpone rebalancing the index until the end of April due to current market turbulence. Investors who are restricted by mandates requiring they only hold investment grade assets will be forced to sell their South African government bonds.

About R600 billion of domestic government debt, equivalent to 37% of the total domestic issuance, is owned by foreign investors. It is uncertain how much of this will have to be sold. Most estimates range between R70 billion and R140 billion. In normal times the bond market would have been able to cope with the selling precipitated by a widely expected downgrade with somewhat weaker bond prices and a lower rand exchange rate. Bonds would have repriced to levels at which other foreigners would be willing to buy. The problem we now face is that, due to the global crisis, capital inflows from abroad have largely ceased, and managing the short-term consequences of the downgrade will prove difficult. As there are multiple factors driving global markets, the impact of the downgrade will be clearer over the coming weeks and ultimately markets will establish a new equilibrium, which will create the stability for a normally functioning market.

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