What could happen to the rand if Moody’s downgrades South Africa

South Africa is preparing itself for the possibility that Moody’s may downgrade the country’s sovereign credit rating to sub-investment grade.

Moody’s is currently the only major ratings agency that has South Africa at 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).

A downgrade may also have an effect on the rand, says chief trader at Standard Bank Warrick Butler, who was speaking in an interview with Reuters.

“A downgrade by Moody’s, which is considered highly unlikely by most commentators, will push the rand back into the R15-area and maybe even R16 depending on market positioning,” he said.

“While another stay and an acceptable MTBPS and we should see R14.35 or even R14.20 swiftly afterwards,” Butler said.

Not all doom and gloom

As weak as the country’s finances are, a new Reuters poll predicted unanimously that South Africa would avoid a credit rating downgrade when Moody’s reviews its status.

Reserve Bank governor Lesetya Kganyago also believes that a downgrade may already be priced into markets, meaning South Africa could see positive upward swing if Moody’s maintains its rating.

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.

“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.”

“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 expected to release its review on 1 November 2019.

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What could happen to the rand if Moody’s downgrades South Africa