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<\/a><\/p>\nIf Moody\u2019s does downgrade South Africa, rand bonds will be excluded from the FTSE World Government Bond Index, which comprises 14 currencies including the dollar and yen, and has about $3 trillion tracking it, according to Bank of New York Mellon.<\/p>\n
Foreign investors own 37%, or about 780 billion rand ($53 billion), of South Africa\u2019s local-currency bonds, according to National Treasury data.<\/p>\n
Here\u2019s what analysts say the impact would be:<\/p>\n
Bank of America<\/h3>\n
The U.S. lender expects a rating downgrade soon after February\u2019s budget\u00a0review<\/a>, doubting President Cyril Ramaphosa\u2019s administration will manage to address concerns about a widening fiscal gap or debt-laden state power company Eskom Holdings SOC Ltd. by then.<\/p>\n But analysts David Hauner and Jure Jeric say markets have priced this in and outflows may only reach $1.5 billion, especially if China and the U.S. continue to buoy emerging markets by reducing tensions over trade.<\/p>\n South African assets are cheap and \u201cpost-downgrade, the market is likely to rise as uncertainty declines,\u201d they said in a note this month.<\/p>\n Daniel Tenengauzer, head of markets strategy, is in the bearish camp and forecasts between $8 billion and $12 billion of outflows if South Africa exits the WGBI.<\/p>\n Its status as the highest-yielding country in the index may not help much to curb the selling, he said. Rand bond rates average 9.2%, about 360 basis points more than those for the second-highest yielding currency, the Mexican peso.<\/p>\n A downgrade around March is possible if South Africa fails to come up with a \u201ccredible debt-stabilization strategy,\u201d which will involve tough negotiations between the government and unions about reining in spending, according to Gina Schoeman, an economist at the Wall Street bank.<\/p>\n Moody\u2019s \u201ctolerance appears low,\u201d she said in a Nov. 4 note to clients, adding that a WGBI exclusion would probably lead to between $6 billion and $7 billion of capital exiting the country.<\/p>\n South Africa\u2019s chances of avoiding a downgrade after the February budget are 50:50, said Peter Attard Montalto, the London-based head of capital-markets research.<\/p>\n A cut has been priced in to \u201ca moderate degree\u201d and could result in $5 billion of outflows, he said.<\/p>\n Annabel Bishop, the bank\u2019s Johannesburg-based chief economist, said a negative outlook, rather than a ratings watch, means Moody\u2019s will probably give South Africa as long as 18 months to improve its finances.<\/p>\n The government\u2019s 10-year local-currency yields may rise to about 10% if there\u2019s a downgrade, but they probably won\u2019t climb as much as those in Brazil and Turkey did when they were cut to junk, she said.<\/p>\n Moody\u2019s \u201creally marked South Africa down because of our politics,\u201d Kim Silberman, a fixed-income analyst at the Johannesburg-based investment bank, said in a\u00a0video<\/a>\u00a0for clients on Nov. 4.<\/p>\n She thinks a downgrade by March is now \u201cquite possible\u201d and the rand would probably drop to 16 per dollar, 7.6% weaker than its current rate and a level not reached since early 2016.<\/p>\n Adrian Schwellnus, a bond trader at RMB, said outflows could amount to anything between 30 billion rand and 200 billion rand. \u201cOne thing is that this global environment is probably the most ideal for a downgrade to happen in,\u201d he said.<\/p>\n \u201cWe do not see a downgrade as early as March as being at all likely,\u201d said Razia Khan, the bank\u2019s London-based chief economist for Africa and the Middle East.<\/p>\n The negative outlook from Moody\u2019s \u201cprovides the authorities with exactly the political cover they might need to take a firm stance on reforms,\u201d and a pickup in growth next year may mean a cut\u2019s avoided altogether, she said.<\/p>\n Even if it isn\u2019t, estimates of outflows of around $10 billion \u201clook significantly overstated,\u201d said Samir Gadio, StanChart\u2019s head of Africa strategy.<\/p>\nBank of New York Mellon<\/h3>\n
Citigroup<\/h3>\n
Intellidex<\/h3>\n
Investec<\/h3>\n
Rand Merchant Bank<\/h3>\n
Standard Chartered<\/h3>\n
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