Asset Manager Review
bonds actually rose quite sharply!
Again, this is probably partly due to the global environment of yield-chasing, but also because investors may have been anticipating what they saw as positive political developments in Brazil.
The same may apply to South Africa – investors may be optimistic that the current political uncertainty here will resolve itself in an investor-friendly way.
So the downgrades are not a bad thing, then?
The key point is that the market’s response to an announcement like a credit downgrade is hard to predict, and may not be the obvious one that we expect.
The reasons for this are varied – we have pointed to some of them above, but perhaps the most important is that investors look forward, and try to anticipate future developments.
Overall, however, the net effect of the downgrades is to make South African bonds less “competitive” when measured against those of other countries, and therefore to make the cost of borrowing, both for our government and for other borrowers (ultimately including ordinary citizens) more expensive than it would otherwise have been.
The possibility of widespread forced selling of our bonds, in particular, is a negative factor.
The reasons behind the downgrades of course are also important. These include the sluggish local economy, deteriorating public finances including those of many state-owned enterprises (SOEs), poor governance at many SOEs, and uncertainty and even a degree of paralysis in government policy.
The downgrades cannot be a good thing! May 2017,
Erich Potgieter & Martin Jankelowitz, Willis Towers
Watson