The ‘upside’ to a junked South Africa

There is very little good news attached to South Africa becoming a junk economy – but the potential downgrade will present some opportunities for investors as well.

According to a report by Reuters, speculative fund managers – those who are not tied down by policies prohibiting investment in junk economies – would likely see South Africa as a big “buy” country, should it suffer a cut in June.

A cut to junk status would force the country’s borrowing costs upwards, and many expect an mass exodus of investment capital from the country as investors flee the market.

However, a number of economists believe that the country’s mature economy and developed infrastructure makes it a prime location for speculative investors.

Speaking to BusinessTech, Efficient Group chief economist Dawie Roodt previously said that a junk rating for South Africa would push investors away from South Africa, but also draw others.

He said that a developed economy like South Africa’s would ultimately hit a level of appeal where it would be impossible for investors to ignore. This view has now been echoed by a number of economists.

Investment specialist at Investec Asset Management Louis Niemand told Reuters that South African bonds at 9% “offer a very decent yield, considering that inflation in the medium to long term is expected at 6% to 7%”.

“It means you’d get a good 2% to 3% real return on bonds,” the investor said.

Another investment specialists said that, were South Africa to reach “9/12” levels again – when the South African markets crashed sharply – the country “would be a screaming ‘buy'”.

The only thing that would counter this appeal, would be intense political turmoil fundamentally impacting central bank independence, fiscal policy and economic growth, the report said.

Ratings agencies, Fitch and Standard & Poor’s, currently have South Africa rated at one notch above junk status – with the former having a stable outlook, and the latter a negative outlook.

Both firms have been in communication with the South African government about the economic conditions in the country – which are bleak – and are expected to make assessments in the coming months.

Standard Bank chief economist Goolam Ballim has said that the country to pray for the best, but expect the worst outcome.

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World Bank’s bleak picture of South Africa ‘flirting with recession’

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The ‘upside’ to a junked South Africa