Russian credit downgrade has effect on SA

The major risk to South Africa is that investment inflows and the rand could be adversely affected if general sentiment towards emerging markets sours. Historically, rising global geopolitical tension has been generally negative for the rand. After a bright start, the Brics (Brazil, Russia, India, China and South Africa) grouping now houses a number of countries with grim reputations internationally that could rub off on South Africa by association.

An analysis of mergers and acquisitions (M&A) activity before and after downgrades in several countries such as South Africa itself, as well as Brazil and Greece, suggest that though foreign investment will not end, investors will over time adapt their portfolios to align to the parameters of their investment mandates.

The sanctions imposed on Russia could continue to fuel our commodities boom, which could have positive knock-on effects on mining services and M&A among other industries that service the mining industries.

A study of economies like South Africa’s – which includes commodities-dependent Russia – before and after a credit downgrade suggests that a catastrophic capital flight is unlikely even if the investment profiles between the countries are different. Where opportunity abounds and returns remain strong, there exists a direct correlation between risk and reward.

South Africa has a fairly unique investment profile as an entry point into the continent and as a destination for medium-to-low risk developing market investment. This is unlikely to be affected by the downgrading of Russia, with a further factor being that throughout recent upheavals including the pandemic, the rand has been far more resilient than expected.

If anything, it is possible that the sharp increase in interest rates in Russia – brought on by sanctions rather than the downgrade – could redirect some emerging market investment to South Africa rather than Russia. Post downgrade, both Russia and Brazil experienced a sharp rise in their cost of capital, especially private funding and risk-based investment. South Africa did not have this experience to a marked degree after our downgrade, so it is most unlikely we will experience any such turmoil on another country’s downgrade.

However, South Africa would not benefit from fund managers or pension funds redirecting portfolio investment to bonds, as the country is itself sub-investment grade.

I would recommend that any South African firm involved with Russian counterparts exercise increased due diligence when it comes to monitoring supply chains, imports and exports.