A possible downgrade of South Africa’s credit rating may already be priced into markets, but structural reforms are still needed, says Reserve Bank governor Lesetya Kganyago.
In an interview with CNBC on Thursday (17 October), Kganyago said that government was “alive” to the issues raised by ratings agencies.
“From where we’re sitting as a central bank, what we look at is we ask ourselves the question ‘is a downgrade reflected in the current financial market prices?’” Kganyago said.
“If it is reflected in the current financial market prices, then a downgrade should not have such an adverse effect on the South African financial assets because it is already priced in, but if it is not priced in, we are going to see an outflow of funds from the South African bond markets.”
He added that if the downgrade goes ahead and South Africa falls out of investment-grade-only indices, the country’s debt will still attract investors but market stability may become a problem.
“The problem with those sub-investment grade investors is that they are speculative in nature and they will just introduce volatility of capital flows for South Africa,” he said.
Moody’s is currently the only major ratings agency that has South Africa in investment grade, one notch above junk, with a stable outlook.
The country has been rated below investment grade since 2017 by ratings agencies Standard & Poor and Fitch.
Should the agency also downgrade South Africa to junk status, the country would no longer be eligible for inclusion in debt gauges such as Citigroup Inc’s World Government Bond Index (WGBI).
This would trigger a major outflow of money from the country estimated to be in the region of R100 billion.