What could happen if Moody’s downgrades

Most analysts following SA expect it to lose its final investment-grade rating. But they disagree over when that might happen and what the consequences will be.

The gloomiest reckon it would trigger more than $10bn (R147bn) of outflows and cause the rand to weaken to its lowest level in almost four years. Others say investors have priced in a downgrade and SA assets may even rise in the aftermath, especially if sentiment towards emerging markets stays strong.

Moody’s Investors Service, which rates SA one step above speculative grade, cut its outlook to negative on November 1. If it downgrades, rand bonds will be excluded from the FTSE world government bond indices (WGBI). SA has a 0.45% weighting in the main index.

Foreign investors own 37% (about R780bn) of SA’s local currency bonds.

BANK OF AMERICA

The US lender expects a rating downgrade soon after February’s budget, doubting the government will be able to address concerns about a widening fiscal gap or Eskom by then.

But analysts David Hauner and Jure Jeric say markets have priced this in and outflows may only reach $1.5bn, especially if China and the US continue to buoy emerging markets by reducing tensions over trade.

SA assets are cheap and after a downgrade “the market is likely to rise as uncertainty declines”, they said in a note.

BANK OF NEW YORK MELLON

Daniel Tenengauzer, head of markets strategy, is in the bearish camp and forecasts between $8bn and $12bn of outflows if SA exits the WGBI. Its status as the highest-yielding country in the index may not help much to curb the selling, he said.

CITIGROUP

A downgrade around March is possible” strategy , if SA according fails to come up to with a “credible debt stabilisation economist Gina Schoeman.

Moody’s “tolerance appears low”, she said in a November 4 note to clients, adding that a WGBI exclusion would probably lead to between $6bn and $7bn of capital exiting the country.

INTELLIDEX

SA’s chances of avoiding a downgrade after the February budget are 50-50, said Peter Attard Montalto, the Londonbased head of capital markets research. A cut has been priced in to “a moderate degree” and could result in $5bn of outflows.

INVESTEC

Economist Annabel Bishop said a negative outlook, rather than a ratings watch, means Moody’s will probably give SA as long as 18 months to improve its finances. The government’s 10year local currency yields may rise to about 10% if there is a downgrade, but they probably would not rise as much as those in Brazil and Turkey did when they were cut to junk, she said.

RAND MERCHANT BANK

Moody’s “really marked SA down because of our politics”, Kim Silberman, a fixed-income analyst, said in a video for clients on November 4. She thinks a downgrade by March is now “quite possible” and the rand would probably drop to R16/$.

STANDARD CHARTERED

“We do not see a downgrade as early as March as being at all likely,” said Razia Khan, the bank’s chief economist for Africa and the Middle East. The negative outlook from Moody’s “provides the authorities with exactly the political cover they might need to take a firm stance on reforms”, and a pick-up in growth next year may mean a cut is avoided.