What could happen if South Africa is downgraded to junk at the end of March

Moody’s is expected to issue its next rating review on South Africa at the end of March 2019.

It is currently the only major ratings agency that has South Africa at ‘investment grade’ – one notch above junk –  with a stable outlook.

S&P and Fitch both downgraded SA to junk status in 2018, in response to the surprise cabinet reshuffle and an unfavourable mid-term budget in October 2017.

While Moody’s currently has a neutral outlook on the country, chief economist at the Efficient Group, Dawie Roodt said that he has a suspicion that Moody’s will downgrade the country.

“I know at the moment that they have a neutral outlook, but that doesn’t mean that they cannot downgrade us,” he said.

“Moody’s could give a negative outlook, but I think chances are we will see a downgrade.”

How it will impact the economy

Should South Africa be downgraded at the end of this month, Roodt said that the financial markets are likely to react negatively in the short-term.

“I think the bond yields will shoot up alongside the rand, but I think it will be a short-term reaction. Then we will see both of them recover, ” he said.

“This is because if you compare South Africa’s various spreads to other similar countries – such as Brazil – a downgrade is to a large extent already priced into the market.”

In a longer-term outlook, Roodt believes that a downgrade will lead to an outflow of capital which will have severe repercussions for the country.

“In the medium- to long-term, it will add pressure to things such as the exchange rate and bond yields.

“This is not only because of the downgrade but other factors such as deteriorating fiscal accounts and weak economic growth,” he said.

How it will impact ordinary South Africans

Roodt believes that a downgrade will not have a direct impact on the ordinary South African.

However, the indirect impact of a downgrade – especially over time – could be severe, he said.

“If the rand weakens it will add to inflationary pressures which are bad for the income and living expenses of ordinary South Africans. This will lead to increase to higher interest rates, etc.

“But this is pretty much what we have experienced over the last five years or so in South Africa anyway,” he said.

“It could just be a little bit worse than what we have experienced over the last couple of years.”

The election narrative

Commenting on whether he sees a short to medium-term recovery on the cards for South Africa, Roodt said that there was a general consensus to ‘wait and see’ where the country is headed after the May national elections.

“The narrative is that we just have to wait for the elections and that after the elections the ‘good guys will consolidate their power’ – leading to a bounce back in the economy,” he said.

“I am not so sure I agree with this. I think there are major conflicts within the ANC and the tripartite alliance – especially between Cosatu and the ANC.

“I think things will be pretty much the same as usual even after the elections. The good news is that we may get a better idea of how things will pan out after the elections.”

He added that the elections may be a starting point for a lot more political uncertainty.

Read: How Eskom could junk South Africa

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What could happen if South Africa is downgraded to junk at the end of March